The Road To Economic Serfdom

According to Friedrich von Hayek, the development of welfare socialism after World War II undermined freedom and would lead western democracies inexorably to some form of state-run serfdom.

Hayek had the sign and the destination right but was entirely wrong about the mechanism. Unregulated finance, the ideology of unfettered free markets, and state capture by corporate interests are what ended up undermining democracy both in North America and in Europe. All industrialized countries are at risk, but it’s the eurozone – with its vulnerable structures – that points most clearly to our potentially unpleasant collective futures.

As a result of the continuing euro crisis, European Central Bank (ECB) now finds itself buying up the debt of all the weaker eurozone governments, making it the – perhaps unwittingly – feudal boss of Europe. In the coming years, it will be the ECB and the European Union who dictate policy. The policy elite who run these structures – along with their allies in the private sector – are the new overlords.

We can argue about who exactly are the peasants, the vassals, and the lords under this model – and what services exactly will end up being exchanged. But there is no question we are seeing a sea change in the post-war system of property, power, and prosperity across Western Europe, just as Hayek feared. An overwhelming debt burden will bring down even the proudest people.

The ECB-EU approach will not of course return countries to reasonable levels of growth – the debt overhang is simply too large. The southern and western periphery of the eurozone cannot grow out of their debts under these arrangements, and so will stumble from stabilization program to stabilization program – just like Latin America did during the 1980s. This is bound to be acrimonious, leading to hostile politics, social unrest, and more economic crises.

The International Monetary Fund will do just what the EU and ECB asks to keep the charade in place. The old days when all member countries got nice presents from the euro zone are long gone; now it is all instructions and austere requirements. But enough resources will be provided to keep rolling everything over.

The top three French players – President Nicolas Sarkozy, Jean-Claude Trichet (ECB), and Dominique Strauss-Kahn (IMF) – seem to be enjoying themselves; presumably they think they will end up running things. More surprising is the reaction of other European leaders, who genuinely seem able to convince themselves that what they are doing makes sense – as opposed to being a series of crazed improvisations.

The market is telling them that their euro rescue schemes make no sense, and the market is probably right. Faced with the ugly reality of the loss of confidence in European finance and institutions, the Germans and even the normally sensible Swedish government are increasingly blaming “irrational” markets and speculators for homegrown problems.

The currently preferred messy solution of the EU leaves the world at risk of shocks like we observed this week. This particular iteration may blow over, but another will arise when there is backlash in Athens, Dublin, Lisbon, or – heaven forbid – Madrid.

Meanwhile, rational market participants are selling debt of risky nations, and getting out of the euro. The whole fiasco is now leading to a messy shift away from risky assets all around the world, and the cost to the world of such volatility is not small. Debt peonage looms for a wide range of countries that were recently thought immune to serious fiscal crisis, including the United States and UK.

It is inappropriate for the Europeans to subject the rest of the world to these large, chronic risks. Europe should also recognize how disorderly insolvencies end – it is never pretty. The 1970s crisis in Britain is the model for what may go wrong. Ongoing large strikes, populations disenchanted with all authority, and great economic disruption are inevitably the outcome. When the assets are very cheap, deep-pocketed investors from the US, China, India and of course Russia will swoop in for the crown jewels.

What should be done? It is time to look in the mirror and recognize the problem. Several nations in Europe are bordering on insolvency, and it is now pretty clear that we shouldn’t just “bandage” that over for a few years with large aid packages.

To deal with this insolvency we need to restructure the debts of those nations. But this has to be done in a way that does not destabilize Europe’s fragile banking system. And it needs to be credible enough so that once restructured, the troubled nations will be able to finance themselves easily.

Europe now has the 750bn package of assistance in place, and they should use it to fix the problem once and for all. The ingredients for a solution include:

Announcing an orderly restructuring of the periphery countries’ debt (Greece, Portugal, Ireland and possibly others also). This should start with a standstill and a program of fiscal financing while budget cuts are put in place.

Regulatory forbearance should be explicitly provided to all European banks, with a backstop of ECB liquidity, and a 500bn euro support program to provide capital injections – as was done in the United States, 2008-09.

The nations that are not restructured need to be supported via ECB liquidity lines that guarantee the rollover of their government debt.

The G20 needs to provide support to prevent chaotic foreign exchange markets but also accept a large further devaluation of the euro. At some point the G20 will need to intervene to support the euro via central banks.

Such a comprehensive package of measures would be painful, but it is the only realistic solution to this chaos. It would also restore some credibility to Mr. Trichet and the ECB, who, at this stage, appear captives the fiscal crises in the euro zone.

Unfortunately, there is no leadership today in Europe that could take such decisive actions, so Europe will only reform itself dragged kicking and screaming through successive crises until the current, and many ensuing, problems are resolved.

The UK and US need to prepare themselves for more storms. The United States will be in the more pleasant position as the world’s safe haven, but this will only encourage America’s profligate politicians to spend more and build more debt.

The UK will bear much more pain from euro devaluation and financial dislocation, all exacerbated by its own large deficit and debts. We might well see one more invasion across the channel, this time by bond vigilantes who question Britain’s ability to rein in inflation as it builds too large debts.

At the end of this great tumult, Europe and the UK will have sound fiscal regimes. Debt will be defaulted on or inflated away, and nations will have dramatically cut spending.

Hayek’s predicted demise of western society will prove correct, but welfare systems will prove the victim, rather than the mechanism, erased by a political and financial elite gone awry.

Question: what is it about unregulated TBTF finance that pushed sovereign governments into the overindebtedness that is now causing so much trouble? Rather than that, isn’t the root cause of the problem the combination of democratically-elected governments eager to please, voting populations largely ignorant of the mechanisms and limits of bond-financed spending, combined with (i) growing surplus labor forces that are in need of government support and (ii) political cycles that are too short to impose any long-term accountability on the tax and spend regimes? I see how unregulated TBTF financiers helped governments hide or obscure their true financial situations but without the underlying tendency to spend more than is received I don’t see big finance as the driver of that demand. Also, in the case of the US, isn’t defense spending, not social welfare, the elephant in the room? I and others are getting tired of defense’s free pass –see e.g. Grayson’s recent “the war is making you poor” act:

I think something is lost in all the finance-focused talk about, well, the world of finance.

While power grabs by financial elites definitely play a big, maybe majority, role in these problems, I also suspect that if we started from a focus on the real economy, in which what we make and do determines our well being and the balance of power, and worked our way backwards to the financial economy, which, when it’s working right, is nothing more than a mediator of that process, we’ll do fine.

And what needs to happen is a wholesale, all-hands-on-deck transition of industrial economies from fossil fuels to renewables, NOW. And a re-engineering of all our processes from biological consumption to working in concert with biological processes.

Economically, we need to change our thinking 100% from a paradigm in which growth is a proxy for well-being (which was roughly true for much of human history) to a steady-state paradigm (see CASSE, the Center for Advancement of a Steady State Economy, for more info) that better measures success.

Financial collapses are partly (mostly?) a result of oligarchic abuses of the financial economy, but I believe they are also symptomatic of badly-chosen goals in the real economy.

sounds rather clinical, like prescribing radiation and chemotherapy for cancer patients. Perhaps necessary medicine to save the patient but the survivor will have a long recovery that involves strict regimens difficult to follow. Isnm’t the problem in the EU and the U.S. that the governments have rushed in to increase benefits, restrain taxes, and spend wildly to mask the extraction not just of wealth, but of real competive productive capacity in the U.S. and Europe. Or you could look at this in the EURO case of acting out community values without regard for economic differences across the countries of the community. In the U.S. case, the betrayal of the idea of corporate citizenship in big companies–GE for example–and the delinking of the profits of big banking from the prosperity of average Americans thanks to the Fed and Treasury have created the trajectory of the very feudal state you describe. Serfs will outnumber the lordly class.

There are two aspects of the current problems that, IMO, are underappreciated.

One is the huge volume of leveraged derivatives still sloshing around in the credit and equity markets. They are inducing amplified market swings and are very, very expensive for industry of all kinds.

Two is the revenue side of everyone’s budget. Progressive taxation, within certain ranges, seems to have had a salutary effect on government budgets historically–without having a negative effect on economic growth. And of course, one must actually collect the taxes.

I do agree that haircuts need to be meted out on credits. Unfortunately, sovereigns seem to have adopted the position that the old concept of “profit and loss” doesn’t apply to bondholders.

The phrase “welfare socialism” doesn’t appear once in Road to Serfdom.

In fact, page 31 of Caldwell’s introduction in the book states:
“…Hayek’s logical argument from The Road to Serfdom: a welfare state is not socialism.”

In your introduction, you state: “Unregulated finance, the ideology of unfettered free markets, and state capture by corporate interests…”

The state has been captured by corporate interests. I assume these corporations are exerting influence so State law and policy benefit their corporate interest.

If that’s what you mean, I agree. I presume Hayek would agree as well.

BUT, once that system is in place there is no “unregulated finance” or “free market”. The State enacts policy so finance and markets benefit corporate interests.

Despite rhetoric, most corporations are not in favor of free markets. Huge banks loves getting capital from the FED at 0% while being backed by tax payers. BP loves the cost cap of drilling cleanup at $75M.

I agree with MikeBC that deficit spending on social programs may be the root cause of the crisis in the eurozone. I also agree that defense spending is making Americans poor aside from the many jobs created in the defense sector. Many other nations have better roads, education and healthcare, while Americans own the biggest army in the world. A recent Canadian documentary by David Suzuki (The Nature of Things) points to outer space as the new frontier in military spending, and will result in the largest industrialization project of ALL TIME.

I find it a remarkably ignorant argument from the left that interference with markets and capitalism, by government, is somehow an indictment of free markets and capitalism instead of an indictment of government interference.

In free market capitalism entities with capital structures such as FRE & FNM would have been shorted and sold into oblivion without cost to taxpayers.

Therefore the dominoes of Bear, LEH, Citi, AIG et al would not be, at least not based on the pyramid of home ownership.

Perhaps the weakness would have been elsewhere as it always is, but we can only observe the observable, not what is unknown as the weak will always attract the “wolves”.

Insane leverage ratios was and still is, encouraged and protected by government and the wolves will always be hungry while seeking out these weak mutated social experiments within the market.

I’m sorry, on what planet did we actually have unregulated finance and unfettered free markets. Despite some “deregulation” in the 80s and 90s, finance continues to be one of the most heavily regulated sectors there is. And unfettered free markets? Government spending as a percentage of GDP has been skyrocketing.

As was suggested and reaffirmed on a BBC broadcast last evening: “More surprising is the reaction of other European leaders, who genuinely seem able to convince themselves that what they are doing makes sense – as opposed to being a series of crazed improvisations.” To soften the landing, try some hard candied derivatives – it comes in several flavours – plain wrapped vanilla, white chocolate, brandy, cinnamon twist, fresh mint. (Here in the states, another wave of political fortunes will be told fairly soon.)

The US effort at re-regulation of its financial system puzzles me. There seems to be broad consensus that transparency of securities and balance sheets plus restrictions on leverage are the basic goals.

One side wants specificity in the legislation. Another side counsels more for “principals based” legislation that provides regulatory flexibility.

I don’t think the two sides are mutually exclusive. I don’t understand the conflict.

What I wonder about is whether those demanding principals based legislation only, fear that setting specifics (such as capital ratios) will reveal banks remain insolvent.

If banks are still insolvent, and still in need of additional capital, then the underlying problem is really one of large bank insolvencies. It’s the oligopolies, stupid.

In that case, the barber shop needs to re-open and give the banks military crew cuts. Officers retired early (or too late depending upon point of view) and debt converted to equity–or worse if they’re still insolvent.

If these actions take place, the debt and interest problems are well on their way to being solved.

You free-marketers all base your defense of free markets on the fallacy of an absolute–that we’ve never had an absolutely free market, therefore it must be great.

The problem is, the more free market elements are implemented (deregulation, tax cuts for the rich, etc.), the worse things get, especially for the producers: the people doing the work and producing the wealth.

Actually, the more accurate observation is “GDP has gone into the toilet.”

From that point of view, the challenge is to resurrect industry. Policies boosting employment, and reducing unnecessary costs like bloated intermediation, would help much more than reducing demand when there’s no demand to begin with.

Just simplifying banking would save trillions in the coming decade. If you keep asking the wrong questions, then the answers you get won’t solve the problems.

In support of the authors’ thesis I’ll suggest that the default condition of any economic system is one in which a wealth, power and knowledge are concentrated in the hands of a few who are supported by an impoverished and ignorant many…just as the default condition of a building is a pile of rubble, unless that building is maintained. (Almost all pre-industrial and third world societies fit this default condition. Our neighbor Mexico fits this condition; its relatively small economy is home to the world’s richest man!)

The Industrial Revolution was a process in which huge, but limited, surpluses of land, energy and raw materials enabled cultures to build complex economic and educational structures that spread wealth,knowledge and tore open decision making bottlenecks in politics, religion, trade and learning and distributed decision making widely.

Over the past decades economic growth has slowed and we’ve failed even to maintain the complex infrastructures that widely distributed education, political power and wealth. (For example, public education is being dumbed down as class sizes increase and college costs exceed the means of middle income folks.) Clearly, opportunities for political power and education are now tied to economic wealth, which is becoming more and more concentrated in the hands of a few and past on by inheritance rather than by personal merit. It is a process which leads to the default condition unless actively reversed by investments, education and legal actions. There is a tipping point, from which it’s virtually impossible to recover, I’m not sure how close we are to it, I hope not too close.

“Regulatory forbearance should be explicitly provided to all European banks, with a backstop of ECB liquidity, and a 500bn euro support program to provide capital injections – as was done in the United States, 2008-09.”

Ok. What should be asked of the banks in return? I understand the need to prevent the collapse of the banking system. However, what should the consequences be for bank management, the board of directors, the shareholders, and the bondholders? Should there not be strings attached to backstops and capital injections?

The phrase “free market” should be banned from discourse. The accurate phrase should be “competitive markets.”

Competition, and the resultant innovation, increases if the number of participants increases. And, pray tell, what increases the number of participants?

Income and the resultant ability to raise capital.

We’ve been pouring money into the top of the wealth pyramid through idiotic tax policies. The result? Fewer participants. The top of the pyramid is like a sponge. The water (money) doesn’t trickle down. It stays right where you poured it.

Start watering the base of the pyramid. Instead of watering the top 5% of the population, water the bottom 95% instead and get them into the action.

Your probability of success will dramatically improve as a result.

Install progressive tax tables and enforce them. Take the additional revenue and direct it via subsidies to new, innovating industries. Nurture innovation. Get more people in the game.

There’s no doubt at all about how “unwitting” each step is on the road to neo-feudalism. How many decades would we have to go with each step being a step further in wealth concentration, the stagnation and deterioration of real wages, the shredding of the safety net, privatization of public property for pennies on the billions of dollars, scorched earth deregulation, galloping corporate welfare, the assault on civil liberties, and imperial agression economic and military, before we should start to figure that’s all one unified, systematic, intentional plan of attack?

Hayek was right about the road to serfdom all right, but he wasn’t “wrong” about the mechanism, he was lying.

It’s an example of the classical totalitarian lie where you accuse your opponent* of doing exactly what you’re planning to do. In this case, the road wasn’t to welfare serfdom for the mythical (i.e. non-existent) Randian “talent”, but to serfdom for the vast masses under the tyranny of neoliberal corporatist kleptocracy.

Hayek himself said it best: “I’d prefer a neoliberal dictatorship to a public interest democracy.”

Today the plan is well advanced.

[* Corporate liberalism wasn’t really oligarchy’s “opponent”, but a temporary mid-century co-optation stage afforded by the heyday of cheap, plentiful oil. But they always planned to liquidate the welfare state later on. We’re now in the end game of that process.]

Does “restructuring” of sovereign debt mean we pay bold holders/creditors less, and thus impose a de facto tax on wealthy investors as a means to reduce debt? Does that mean these people are currently undertaxed, which is different from saying ordinary folks get too many benefits?

“Regulatory forebearance” for banks?? What is it we’re not punishing them for?

“Backstop of ECB liquidity” — does that mean that in the lucky not-taxed enough countries we won’t tax the bond holders/creditors but will instead pretend the bonds held by those wealthy people are worth full value and either pay it or allow them to use it aa full value to borrow more? Is that different from “rollover” of sovereign debt for the chosen countries?

And while all the “austerity” = we pay you less for your work — is going on, what is the mechanism to stimulate the economy, since private demand is depressed, people are losing wages, and there’s zero fear of inflation?

And if it’s possible to “inflate” out of the debt crisis, doesn’t that suggest the central bank just print money and drop it out of helicopters?

Nah. Take the $500 billion and ship it straight to the population. Extract the $500 billion from the wealthiest 5% of the population.

Force transparency on TBTF banks. Make them earn their profits through productive investing, rather than swapping spit on a trading desk in order to siphon money from the productive economy. This would save economies trillions annually. Just doing this!

Actually..there is a “reset button”..a mechanism of enormous power..both socioeconomic..and sociopolitical in nature.

This power is also..by proxy…the “reality”..regarding any chance of actual..”Genuine”..”Serfdom”..or..”Corporate government”..”over”..the “Citizenry”.

Simply put:

“Stop…Paying…For…It!”

In France..”Strikes”..have traditionally..”Shut Down” the nations Trains..and numerous other major facets of “Critical Infrastructure”.

In America..a Consumer/Tax based ‘Government’..is ultimately..completely reliant upon the citizenry to “Finance”..to Co-Produce…to be the “Backers”..of every…single..delusional “plan” the Corporate Government arrives at as a “Solution”.

When “Elections” no longer work…when Corporate “Citizens”..are given the “Right”..by the “Courts”..to simply..out-shout the actual ‘Citizens’…well..this then becomes the “moment”..to hit the “Reset”..the “Control-Alt-Delete”…and return the “System” to Default Settings.

America is frankly..not going to ‘Survive” if this reality is not quickly understood by the citizens.

Nor will much of Western Europe!

With the Exception of the UK..which is in fact..a “Surveillance State”..the “People” of the West..simply Must..”Stop…Paying”.

A “General Tax Strike”…a Unified and “A-Social”..as in..”Leave The Social Agenda’s At The Door”..”Union Style Tax Strike”..with a list of Demands for “management”…or..”No More Money”..is sadly..the Only Way.

What we have today..in our Corporate Government..is a kind of “Hitlerian Arrogance”..an Ego-Centric attitude…which constantly..in a never ending series of self-serving “Policies” and “Solutions”..continues to address these Critical Situations with what amounts to:

“Invading Russia In The Winter”.

An Impossibility…the “result”..of course…is yet another horrific set of “Results”..as the “Solution”..never had so much as a “Chance” of “Victory”.

So..its time to Defend our Liberty..and our very Futures..by “De-Funding” these ‘Corporate Governemnts’…”Govcorp”..has got to go!

So..just…Stop…Paying!

For..if there’s any..one…single “Fact”..in all of this..its that “You”..are in fact..”Paying”..for every single “Policy”…”War”..”Bailout”..”program”..etc..every “Sallery”..from that of the “Representative”..to that of the “Enhanced Interrogation Specialist”..your…paying..for..it..all!

What is most interesting to me is that $ itself is now imaginary. Just numbers in computers. The whole of human society is living in delusion. If there was a disaster and no electricity for a year, where would this $ be? Who could access it and more important, would people accept valueless pieces of paper? The human race needs to go back to gold-standard or come up with a new realistic monetary system.

EUROPE FOLLOWED AMERICAS LEAD AND AMERICA FOLLOWED MILTON FRIEDMAN-IT SHOWS HOW AN INTELLECTUAL CAN BAMBOOZLE WITH HIS CONFUSING ECONOMIC THEORY AND EVEN GET NOBLE PRIZE. WHILE BEING PRESENTED WITH THE PRIZE AND FETED BY THE AUDIENCE ONE LONE PROTESTER YELLED OUT IT WAS FRAUD. SO WHAT’S THE LESSON?

“That evidently is what stock markets around the world anticipated when they soared on Monday morning at the news of Europe’s trillion-dollar bailout. What really was bailed out is the principle that economies should be stripped so that finance capital may rule. But the fight surely is not yet over. It will escalate for the remainder of the 2010s, because it is nothing less than an attempt to roll back the history of the 19th and 20th century’s struggle to replace the power of vested property and financial interests with principles of progressive taxation and public enterprise.”

If anyone wishes to read a first class historical analysis of this question here it is:

I completely agree. The premise of this article is absolutely false; that “Unregulated finance, the ideology of unfettered free markets, and state capture by corporate interests are what ended up undermining democracy” is ideological claptrap. This is surely the pivot point pursued by the author. By first laying a foundation out of his wished-for straw man (that free markets are bad, very bad), he can build the argument for communist utopia, or one world government, or whatever other radical left-wing fantasy. Western governments spend more than they take in, with union workers and entitlement spending being chief among the sins of these bodies.

“…sounds rather clinical, like prescribing radiation and chemotherapy for cancer patients. Perhaps necessary medicine to save the patient but the survivor will have a long recovery that involves strict regimens difficult to follow.”

Isn’t the argument that the “wolves” have wormed their way into the government and corrupted the system of regulation. That’s called “regulatory capture”. The private system of corporate evaluation, the Moody’s and S and P’s were also bought by their so-called clients – in a pure free market move – which caused the evaluators’ product to provide false results. So goes the myth of “perfect information” on which free markets depend. Then the biggest aggregator of private information, Goldman Sachs came out on top – but even they needed bailing out. So the public bails out the very guys who rip them off. Untenable politically.

The fractional reserve system is publicly funded, privately managed. This is the mechanism generating serfdom, to impress upon others that it is otherwise is dissembling in the service of the overlords.

Now it is true that Sarkozy’s brother, “Oliver”, a guy with a Medieval MA from St Andrews, at the head of the Carlyle group when he was 35 years old is sheer corruption in action, as Sarah Ferguson’s asking $ 700,000 to give access to prince Andrews, the British trade representative. Both these worthies, Sarko’s bro and Andrews were born that way: that is aristocracy, at its best, indeed.

What we have had for decades is government finance. Not the government doing finance, but finance being the government.

It’s how the Fed and Treasury and fractional reserve system work. So, all along, there were no free markets: it just was organized to look so to the naive, who gobbled the whole thing down, hook, line, sinker, and now they find hard to swallow the boat, so their pre reptilian cognition is getting all confused. Funny is the sight, pathetic the outcome.
PA

It would not be mutually exclusive if our legislators were acting in good faith, but they are not, and there is every reason to believe that the flexibility proposed by that camp is cover for ultimately doing nothing, or as little as possible.

It seems we’re keeping grandpa on artificial life support instead of allowing Nature to take it’s course. He had a good life, perhaps we should agree to let him go. It seems to me this is not just an economic flu. We can’t save this status quo. This is, as Redd Foxx used to say, “the big one!”

And systems this complex do not fail gracefully. The answers, whatever they are, do not lie in better life support for grandpa, but rather in turning our focus to the next generation — the next generation of children and of world orders.

Perhaps we can incorporate two lessons from this failed system into the design of what’s next.

1) Just as the U.S. has separation of church and State, the next system will need to separate business and State, a separation that does not have to be adversarial. (Religions have thrived in the U.S., after all.) A State-supported corporate economy is not a free market. The plutonomy must end.

2) Just as there are banks too big to fail, there are economies, i.e., nation states, that are too big to fail. Would all of Europe be on the brink of failure if Greece still used drachmas? A global network of smaller decentralized economies will be much more resilient.

Stop paying? What then? When everyone stops paying, I, like 40% of Americans whose paychecks are derived from government spending of some sort, will disappear overnight. All this will happen at the same time that police, fire, National Guard, courts, prisons, hospitals, and every other publicly funded service cease. Have you ever been to a country where those services either don’t exist, or are so sporadically funded as to function only for those who have the cash? I doubt it.

I suggest you take an extended vacation to Somalia, to see what your plan will do to Western society.

We live in an evolving Plutocracy, the elites were always against any variety of democracy. They will return as much of the rabble to poverty as is necessary for their ends as they see these people as surplus population. We really should bring back titles for these people so we can accurately identify them. They are being allowed to masquerade behind the obsolete notion that we are all equal. They don’t believe it and neither do many of us. Their titles shouldn’t hereditary that’s the only difference. We shouldn’t allow any conceit about blood. let them however buy their titles from the State for a fee paid each year in cash. people like Donald Trump would be first in line to be a Duke or an Earl.

Re: @ nmewn_____Would it had been better if the Government subsidized public housing for the homeless (at the taxpayers expense?) multi-millions, rather than get some money,(basically its a wash,except for pride,and self-esteem of homeownership – you choose?) or better said, “Bang for the Buck” by offering homeownership instead? Fannie & Freddie are regulated GSE entities – that is, No-Doc’s,Unverified Employment,Level of Income, etc.,etc., are a No-No,period! The private banks (BAC/WF/WAMU/Countrywide/JPMC/Citi/Wachovia/etc.,etc.,) caused the housing crisis in the private sector – were it not for osmosis,the GSE’s probably wouldn’t have been hit so (guilty by association?) hard. Take a real hard look at the public records regarding homeownership defaults – you’ll find ~65% plus from the private sector. PS. Ask yourself this? What country in the G-20 doesn’t offer housing, whether it be subsidized or private too keep the masses from living in the sewers? This is where Government,and Free Market Capitalism mutates paradoxically into a symbiotic relationship of the 3rd Kind?

The G20 Summit will be held in Toronto this June. Perhaps the G20 will revisit an idea pushed, as early as the 1990s, by Paul Martin (former Liberal finance minister and prime minister of Canada) which is to create a — bankruptcy process for sovereign debt. — Channeling Michael Hudson: socializing the losses created by the “kleptocrats” and squeezing repayment out of public goods and “ordinary” citizens is Junk Economics.” See Pitch Forks

bailing out banks via the state who make loans that shouldn’t be made (either to government, corporations, or citizens) is not the free market.
Your comments show very little understanding of what is being said. In fact the economics of the situation are much more alike with communism than capitialism. those industries with state connections aren’t allowed to fail. they receive state supported subsidies, and promtion and failure have more to do with connections and power than merit.

the idea that hayek is some kind of commie is just plain old wrong.

you need to read some of the works of the economists to better understand what is being said.

Yes Patrice, I’ve been thinking something similar. It goes without saying, fiat money and fractional reserve banking are social constructions. There is a high degree of government regulation in these constructions.

How can someone bring Hayek into a conversation about the free market and not bring up that interest rates have not been free due to the FED with powers bestowed upon it by the government? Given that we’ve had a loose credit and high leverage crisis, you would think these things would be important. Just a big LOL at Johnson and other ‘masters of the universe’ arguing that they have any solutions to any problems. They’ve failed miserably in the past and would quit their jobs if they had any dignity.

The reset button is not to stop paying governments, it is to stop paying Corporations. The only pressure they understand is from our dollars. We are no longer citizens, we are consumers to be led around through advertising. If we stop listening and use our money on what is important and what is sustainable, they will get the message soon enough and will court us to get our dollar back.

to this illuminating article and most of the ponderous responses, i can only offer an opinion of a small relief for europe: just get rid of the uk and their cumbersome debt before they call the euro to the rescue! given the special relationship with the usa give them entrance as the 51st state and let the dollar take care of them! it may be a bit of a comic relief on my part, but better than the hypocrisy of being neither in nor out of continental europe….

RK, by that reasoning, the concept of private property or ownership itself is (and has always been) delusional because it is not part of objective reality (i.e., there is nothing in the molecules of your wristwatch that make it “yours”). To say one “owns” something is just a prediction of the way a court will rule in a particular case and the resulting application of state force (h/t Justice Holmes), the rest is social convention. You’re not wrong but you’ve proven too much.

One could argue that that swapping of spit is an employment program for those who assist the oligarch/plutocrats who like to toy with their capital (sloshing it around from hedge fund to hedge fund, buying and selling companies, etc.) and who would otherwise be unemployed. Who is getting the trillions that are saved annually in your scheme?

Gee, I thought serfdom long existed in the US from any practical application view. ALmost everyone steadily employed is employed by organizations that control capital. The organizations are mostly controlled by ” control employee’s”. From a practical perspective this is proven by the huge numbers of employees that are dismissable at will. The usual attitude I experienced was the truism that “Do what I want, there are hundreds more of you just waiting for a job” applies to the vast majority of individual workers. Any boss knows quite well how to get rid of people that displease them.I include myself. Legal or otherwise. They also know they are subject to the same rule in any organized corporate pecking order. Even the top of the heap sometimes face the same problem if they make too much trouble by omission. Look at the developing clamor for Blankfein’s head. Of course , he was adaptable enough to line his pockets from foresight and created opportunity.

Beneath the steadily employed working serf are those really in a bad fix. These people are so fungible they are hired as ” independent contractors” even though the hiring small business knows full well that these people are employees under Section 578 of the Internal Revenue Act of 1978 and under common law for eons before that. The payroll tax evasion is stunning as evidenced by estimates published in the Internal Revenue Bulletin from time to time. It should be noted that the worst evasions of even employee protections occur in the American paragon of right wing virtue… the small business person.

All in all, the free joys of serfdom has long been here for the employed to enjoy.

The business state has long ruled the US with temporary upsets. Even in our vaunted free market 19th century the controller of capital ran things through control of bank deposits and financings generally. The really lowly employed then were tenant sharecroppers and labor in industry. Even old Bob Cratchit was a serf of the worst kind for Ebeneezer Scrooge.

THE NEED: El Pais today has a long essay by Jurgen Habermas stating that the European stability mechanism is in effect an instrument of community transforming the eocomical basis of the UE,and the ‘de facto’adding to the IMF’s desire of a european economy government and points to the new indifference in Germany, resulting in a sleepy consciousness of the crisis and short-termism: the 82 year old philopsher concludes: With a little political nerve, , the crisis of the common currenccy could end up producing the consciousness, beyond the borders, of belonging to a shared European destiny.

In the Euro is decided the destiny of the UEhttp://www.elpais.com/articulo/internacional/euro/decide/destino/UE/elpepiint/20100523elpepiint_2/Tes
THE AFTERMATH: Then the well-informed Spanish newspaper ( Spain assuming the rotating Presidency of the UE this semester ) goes on to explain the practical outcome of the emergency, following the meeting of the Finance ministers last Friday: creation of a ‘task force” composed of the 27 ministers + Trichet+Juncker+ Ollie Rehn, the new ‘Monetary Commissioner’, a report to be disclosed in June and in October a final document
with the practical legislation reforms..The emergency in action (..) dominated largely by the plan submitted by the Germans
THE REAL FACTS: The Financial Times Deutschland carried an interesting article on Willem Buiter’s,o had previously advocated for the setting up of a 2 trillion European Monetary Bank, doing back of the envelope’ srecalculation, calling too late but realistically for a revised 2 trillion euros plan : Combined budget deficits: 565 billions /Total
public liabilities: 7 trillion, assumed with a 7 year matirity, and with a 5% interest rate: 500 billion
annually. The 860 billion package, if one includes Greece, thus covers but a year, while the plan was designed for three years.
And here do we go back to the road to serfdom, any observer will have noticed that there is neither a word nor a figure related to growth, just facing the
mountain of debts, save for the potential finance tax,
which the German minister, for the reasons we all know, will not it make through te forthcoming G20.

Of note also: your ‘bail-out’ Treasury secretary is on tour the coming week, probably lobbying for the hedge-funds, with stops in Berlin and London

Yours is a complete lie and obfuscation. Are you a hired Republican liar? We will fight you until the end, until this world becomes what it can and should be, and is not undermined by evil greedy naysayer obstructionists.

@ Joe from Boston: I don’t see where in the text you found this hostility to the market?! The authors are principally saying that the European leaders are blaming everything on the markets while they are showing the right direction.

The hostility between market and democracy rises when any of the two becomes ideology. One tends to populism, one to serfdom. That’s the message I get from the text. All the authors are saying is that, instead of taking markets as sacrosanct, one should envisage giving the investors a haircut once for all for the good of world economy.

“would lead western democracies inexorably to some form of state-run serfdom.”

I don’t have the chops or energy of Gavin Kennedy who corrects errors about Adam Smith, but I would like to do something similar for Milton Friedman, Hayek, and Edmund Burke. Here, I want to make one simple point: Hayek did not believe that history was inexorable. He believed just the opposite! He thought that a certain view of Socialism might lead to consequences that the Socialists themselves wouldn’t favor. He also did seem to believe in the 1970’s that a Welfare State could lead to similar consequences.

For a number of reasons, I don’t agree with him about the Welfare State, but I do about Socialism. If the book is as silly as some people think, why did Keynes and Orwell praise it when it came out? Try reading A Parting in the Road in Hayek on Hayek at least.

This article is mainly non-sense. After all:
Euro is still MUCH MORE valuable than US Dollar and not LESS.
Again Euro is MUCH MORE valuable than the US Dollar and not less.
In fact as of this writing it is a MIGHTY 25% more valuable than the US Dollar.

So Euro is KING and will continue to be KING, will continue to be MUCH MORE valuable to the US Dollar, because Europeans are not suffering from a party of Lunatics as US is with the Republican party and Europe is not suffering from a right-wing (aka Lying) war-mongering media as US is with such lying machines as Fixed news, Talkradio, Wall Street Journal, CNBC, etc. etc., as a result of which:
1- European Governments invest much more of their People’s money (Taxes) in their people and cities via such things as Universal nationalized health care, Universal education to Ubiquitous (electric powered) public transportation etc.
2- European Governments do not waste their people’s money on Unnecessary Wars (Iraq War, Vietnam War, etc.) or on a Gargantuan Military

Frankly, I am sick of reading “solutions”, even ones that might work when all of us know NOTHING WILL HAPPEN that might work. The entire world financial system is “fixed and gamed” and only the cockroaches will survive, and we know who they are. At least I can grow a garden and have a yard to keep a cow and chickens.

I think we in the West are utterly missing the cause of what is going on in the world. The Left blames unfettered capitalism and corporatism and the Right blames statism and cradle to grave benefits. These are not the causes of our underlying problems.

Instead we live in a world that has shrunk dramatically with the advent of peace, airlines, advanced shipping and the internet. The West has used the undeveloped world as a treasure chest of riches while allowing the people there to languish in poverty and economic feudalism. This is not all the West’s fault certainly but with the advent of free trade around the world, the least capable in our societies are being hard pressed by the most capable in foreign countries.

We face a world that must equalize its wealth and to do so will certainly make everyone in the West poorer. The bloated public sector will face the international competition that the private sector has faced with increasing ferocity since the late 1970’s.

That is what being a serf boils down to: One of the middle class serfs because I have a cow and chickens. The soon to be out of work fishermen and shrimpers are already serfs to BP. I guess the British got the last “shot” in after all after 1789.

Rather than stop paying your taxes–which will land you in jail–stop investing! The banks and hedge funds can’t operate if no one gives them money to speculate with. So sell all your stocks and bonds, pull all pension and investment funds out of the hands of the banksters, and they will be forced to gamble with their money, not yours.

Invest of something tangible (not necessarily gold, since you can’t eat it) but things that actually have value.

Re: @ beezer____Well put,..GDP is in the toilet. It’s only…going too get worse. Unemployment Check Extentions are maxing out,period. The Gov’t. going to have to dig deep again for another “Big Stimulus”,…let’s say another Trillion $$$ Dollars (paid for by the new “VAT” Tax?) keeping the Keynesian’s serfdom consumers buying goods which account for 70% plus of GDP! Ironic how time, and the global crisis can make a 180 degree turn almost overnight? Corporate America that’s moved offshore to a more lais`sez faire equitable level playing field regarding “Taxation” will fall over each other for America’s pacifying (repatriation thou cometh),” K’Mart Blue-Light Special”! PS. Can’t wait for the fireworks come Jan/2010?

Kind of funny how he leads with this, “Unregulated finance, the ideology of unfettered free markets, and state capture by corporate interests are what ended up undermining democracy both in North America and in Europe.” but really his whole point is excessive debt burden of all these countries is really the problem. The debt coming from too many entitlements and welfare socialist programs. Seems like he recognizes the problem but is still just an anti-capitalist idealogue.

The biggest factor is that we are no longer in control of our own lives. Corporations and goverments have control over our food our housing and even our children, not to mention the most dubious details of our personel lives. The issue is that WE need to be in control of our own lives. We need to provide our own food and housing. Why does a house cost more than most can afford? Greed, plain and simple! Do for yourselves and your own families then you will not need these broken down illusions of safety!!

Re: @ Edwin Lee_____We as American’s,and all people living in the free world, literally have become complacent. We’re fat,spoiled ,and lazy. We haven’t any ideal how well off we are – its time for a reality check. Time too get our priorities in order, period! Nice read, and I to am hoping were not near the “Tipping Point”?

The middle class role in this seems to be as sources of interest. The interest we pay on our numerous loans and credit cards is the same interest the hyper-wealthy collect on just owning money. They invest in our debt.

Meanwhile, we’re driven to a lifestyle where cars, education and housing are priced so that to be ‘respectable’ or ‘acceptable’ you need to take out loans. Getting out of the ‘debt paradigm’ for the middle class lifeis not so easy.

Reminds me a bit of the Matrix.. where the ‘normal world’ of most people was a distraction while they were being farmed by the machines…

The unfettered free market wouldn’t be much of a problem without fiat currency and fractional reserve banking. Some legislation is absolutely necessary,but we should try to minimize how much we meddle in free markets.

That 40% of the U.S. derive their checks from the government is precisely the problem. Like it or not, government employees are not producers, but simply consumers of other’s efforts through fear, intimidation and theft. I agree that a general tax strike is the only solution; I also believe fixing the problem now will be a lot cheaper than waiting until later.

You need to understand this; despite what the government tells you, I don’t “owe” you a damn thing. Go get a job as a producer.

Interesting problem exposed. Fiat currencies are universal along with state or semi autonomous central banks. Only two states now lack a central bank, Andorra and Monaco. I exclude places like San Marino. That said, currencies themselves are a very small part of money that actually circulates.How much of your income was received as currency and how much did you spend as currency? When you deposit currency what happens to it mostly on a marginal basis. A glance at the Federal Reserve Bank currency liability account will show how very difficult and slow it is to convert currency to non currency funds on a permanent basis. Compare that to places like China where personal demand deposit accounts almost do not exist. The issued currencies are nearly anachronistic due to electronics. No where does a free market exist since states are also now all but universal. Even more to the point is that a corporation is the creature of a state that may become the state itself. So long as there is a corporation and a state free markets are as imaginary a concept as perfect markets.

The issued dollar in the United States is less than 5 % of funds that circulate like demand deposit transfers. That 5 % does not exclude dollar currencies frozen up in imprest accounts of commerce or what is held permanently overseas. The other reducer is money that went to the mattresses and does not circulate.

The power of controlled money resides in government as the financial bailout has amply demonstrated.

Every one talks about markets. What are they? Are they independent of people who use them? Markets do not make policies. Markets do not run the governments are economies. Are these markets accountable to anyone? The idea that markets predict the global economic outlook is absurd.

Yes, and that’s the mind numbing thing about these fools. Here’s Michael Hudson on the matter of the Tea Parties:

“America’s Tea Partiers and anti-tax rebels have given up the fight to reform governments. Squeezed by debt from which they see no escape, they demand lower taxes – and are willing to see the highest brackets become the major beneficiaries in an even more regressive tax shift. Faced with the corruption of Congress by lobbyists acting on behalf of the vested interests, they reject government itself and seek safety in local gated communities. They see Congress and parliaments throughout the world losing autonomy to the IMF, the EU and other Washington Consensus organizations seeking to impose austerity and shift the tax burden onto labor and industry, off property and off predatory finance.

“The only way to prevent a regressive tax shift and debt squeeze is gain control of governments on behalf of the spirit of classical economic and Progressive Era reforms. At least, that is what Greek labor is rioting for. Someone must control government, and if democratic forces withdraw from the fight, the financial sector will tighten its grip.”

The question we’re facing has to do with the pilfering of the public sector so as to pay-off the bad debts of the ruling class, that and nothing else. And this rape will succeed with the astonishing connivance of the very people it is intending to victimize unless they wake up and smell the coffee. This whole business of public debt simply sets the table for more of the same kind of theft represented by the 2008-2009 bailouts. And that theft will be realized while dunderheads like Rand Paul are figuring out ways to resegregate lunch counters and reward BP for its oh-so-noble efforts with this government caused oil spill {sarcasm mine).

“Giving investors a haircut” is what the “free market” would presumably have done with insolvent EU zone sovereign debt if it weren’t for the recent government intervention. You seem to confuse holding the market as sacrosanct with holding bondholders as sacrosanct, two different things. The post by Boone and Johnson is arguing (among other things) that there should be an orderly adjustment (read “haircut”) of EU debt now so the troubled sovereigns can go forward on their own two feet without the overhang of unpayable debt, so they are arguing, in essence, for intervention in order to end up with a market-disciplined result but to get there in perhaps a more orderly fashion than the “free market” would allow or encourage.

In any event, it’s hard to even talk about distinctions between free market and interventionism in the context of sovereign debt, which is inherently political.

Thasnks for building all those keeno roads, schools, airports, tanks, fighters, guns, VA hospitals, dams, electrification, etc… Ken
You must be proud of maintaining all that AND keeping a Bopal India type disaster from happening here through our beloved producers.
Move to Somalia, NO TAXES!!!!

THE EURO ZONE CAN BE SAVED.
Sticky nominal wages need not prevent rapid reductions in the effective real wage rate in Southern European nations while they remain in the Euro Zone. Here’s how.

Allow the Euro to depreciate. This improves Europe’s overall competitiveness and imposes some of the adjustment burden on holders of Euro denominated debt.

Greece has been forced to reduce public sector wages by 20% and reduce pensions significantly. The second step is for the Greek government (with help possibly from the EU) to work to attract more tourists and create tax incentives to induce companies to expand private sector employment.

National governments in the EU periphery can lower their real wages still further by increasing their value added tax rate (rebating it on exports) and by offering marginal employment subsidies to companies that increase employment during FY2011 and FY2012 above 2009/10 levels. The migrants who came to the EU illegally or on temporary visas should be sent home to create opportunities for EU citizens. The better off Northern Europeans should be encouraged to vacation in Southern Europe and to eventually retire there (eg. by subsidizing package vacation tours looking at vacation property in the South).

DEALING WITH LONG RUN PROBLEMS—MORAL HAZARD and THE PRODUCTIVITY OF WORKERS IN SOUTH EUROPE

The precedent of EU bailouts of Greek sovereign debt has worsened moral hazard incentives for both EU member governments and the banks that lend them money. The banks that foolishly lent money to EU nations headed for insolvency (probably in part because they anticipated a rescue despite the constitutional prohibition) should be forced to take a haircut. The bank managers who colluded in the violation of EU rules about sovereign debt should be fired. This will make it much more difficult for financially weak governments to borrow in the future.

The EU plans to use Peer Review to prevent governments from overextending themselves. This may work for a while. But, once the crisis is past and memories recede, peer review is will lose its backbone. Member governments (and the regional governments within member countries) will need find a way to convince banks to lend to them without an implicit EU guarantee. I agree with Martin Feldstein that banks should require governments with high Debt to GDP ratios to pledge collateral (tax increases dedicated to servicing the debt or real assets such as airports, railroads, port facilities, toll highways and government owned corporations). This is how state governments in the U.S. handle their debt.

The long run solution for Southern Europe is improved education. PISA test scores (at age 15) and upper-secondary school graduation rates are substantially lower in Greece, Southern Italy, Spain and Portugal than in Northern Europe. Vocational training programs are also of low quality. Assistance for Southern Europe should focus on reforming education systems and making learning more relevant to worker productivity.

A steady state economy is, unfortunately, a dream. How will our quality of life stay steady with a rising population without a somewhat growing economy? It’s like having an apple tree that grows bigger and bigger until one day you cap the yield at 50 apples. At 50 apples, everyone on the farm can have a few apples and they’re happy. Over time, more and more people start showing up at the farm, and the average number of apples everyone can have goes down, which makes them less happy until so many people show up no one can really get an apple anymore without denying someone else an apple. Congratulations, you just recreated scarcity, and an artificial one at that. Apples are even a renewable resource!

The only way to solve increasing resource use is to cap the resource consumers, not the resource. That means constraining birth rates or killing people off until the population and resources reach equilibrium. Granted, we can delay the inevitable by asking people to consume less, but that will only give us more time until the population catches up and we exceed the original demand that caused us to ask them to consume less. No where on the CASSE website that I can find do they talk adequately about population control, just that population should “remain steady or mildly fluctuate”.

“Serfdom is the socio-economic status of unfree peasants under feudalism, and specifically relates to Manorialism. It was a condition of bondage or modified slavery which developed primarily during the High Middle Ages in Europe. Serfdom was the enforced labour of serfs on the fields of landowners, in return for protection and the right to work on their leased fields.”

“The long run solution for Southern Europe is improved education. PISA test scores (at age 15) and upper-secondary school graduation rates are substantially lower in Greece, Southern Italy, Spain and Portugal than in Northern Europe. Vocational training programs are also of low quality. Assistance for Southern Europe should focus on reforming education systems and making learning more relevant to worker productivity.”

Has the author ever even read “The Road to Serfdom”? Please do not make any judgements on Hayek until you have read the book. This author has either deliberately or ignorantly misstated Hayek’s work. This article is little more than propaganda. If you do not belive me, I challenge you to read “The Road to Serfdom” and come to your own conclusions.

Mr Martin is currently occupied running the family business, Canada Steamship Lines.

“Throughout the 1990s, CSL Group Inc. oversaw the reflagging of several former Canadian-registered vessels which were placed under the shipping registries of nations commonly referred to as flags of convenience, where safety and labour laws were relaxed to be more business-friendly.

Paul Martin and his friend Lawrence Pathy secured financing and announced their intention to purchase CSL Group Incorporated for the price advertised ($195 million CAD) by Power Corporation.”

It is a misconception that corporations are in favor of free markets. The largest corporations contributed heavily to those who on an almost daily basis, vilify them publicly. Why should they care when they are deriving tremendous benefits from the government intrusion into business? Competition is being destroyed by the regulation and taxation pouring out of a government backed by most of the media. Both of whom are feeding off of anti-business sentiment and the class warfare they have promoted.

Despite rhetoric, most corporations are not in favor of free markets. Huge banks loves getting capital from the FED at 0% while being backed by tax payers. BP loves the cost cap of drilling cleanup at $75M.

“There is big money making big bets that at a minimum we we’ll have a recession if not a depression that could last for years,” said Kevin Giddis, managing director of fixed income at Morgan Keegan. “It’s a scary scenario to subscribe to, but that’s the current one being batted around.”

It’s not a theory that Giddis agrees with; he believes the U.S. economic recovery is strong enough to withstand any problems with Greek debt and the euro. But he thinks that the market has been too spooked by fears of another economic downturn. He believes the trading has moved beyond the typical flight-to-quality that can drive down bond yields and drive up bond prices at times of uncertainty.

“There’s a risk aversion trade and a fear trade, but we’ve taken this to a level on steroids,” he said.

“In 2005, Raghuram Rajan stood before a room of prominent economic policy makers celebrating Alan Greenspan’s legacy and presented a paper about how the world was headed for financial disaster. The University of Chicago economist was roundly scoffed at even though, as it turns out, he was right.

Now that the crisis he predicted has abated, is he more optimistic? Not necessarily, because, as he argues in a new book, the real causes of the crisis aren’t yet being addressed. TIME spoke with him about the conclusions he draws in Fault Lines: How Hidden Fractures Still Threaten the World Economy.

…people should be making loans they expect will be paid back. If you need a regulation for that, then your system is totally broken. In a society that makes these sorts of loans the problem isn’t just with the brokers or the bankers. The forces are much deeper and broader.”

“The long run solution for Southern Europe is improved education. PISA test scores (at age 15) and upper-secondary school graduation rates are substantially lower in Greece, Southern Italy, Spain and Portugal than in Northern Europe. Vocational training programs are also of low quality. Assistance for Southern Europe should focus on reforming education systems and making learning more relevant to worker productivity.”

Very well said, John Bishop. And everything in that paragraph about Greece, S. Italy, Spain and Portugal also applies to the United States.

An awful lot of the “producers” employed by the private sector derive income from government contracts. Tech, manufacturing, construction, think about it. Consider the defense budget alone, and the fact that those with such contracts are so nicely spread among the fifty states.

Re: @ Jan____No Jan,…their firing a double barrel shotgun. The final shot will be when Britain’s “Israel” invades Iran, thusly the final fight will become the United States the adopted surrogate mother. This will put us in three, maybe four wars simultaneously. This is how the mighty UK has felt about America’s serfdom to the “Crown” since our inception! Cheerio?

When you pull your money out of the market, if you don’t keep it in a mattress, make sure it’s not in a TBTF bank! If most of us put our money in the small community banks guess what would happen to the TBTF banks? The government would bail them out with OUR taxpayer money…AGAIN, because (repeat after me)”They are TBTF!” The FDIC has got our (morally hazardous) back. And the FED has got the TBTFs backs. And they (the FED and the TBTFs)are behind us doing you-know-what to our backsides!!!!!!

Re: @ Jerry J____I’m not sure if you included Iraq (as a state),…oh my mistake – since the invasion ,they now have a Central “Fiat” Bank. The last I looked – only two (state) countries are without a central bank, that being Sudan,and Afghanistan? Strange,…

Specificity is necessary in the legislation, otherwise regulators will be at their leisure to enforce, and the Roberts Supreme Court will find the laws silent on a myriad of issues. Check out Stoneride v. Scientific Atlanta for scheme liability.
A loophle is essentially an invitation.

We have subsidized housing already for the poor…no one lives in the “sewer” unless of their own free will…apples to apples.

Regarding your 65% default ratio on homes. I would hazard a wild guess that job loss and prospects has more than a little to do with it…as people default on primary and second homes and condos, young ones barely scraping by going back to the nest etc…but the seed of this bubble was the CRA there is no way around that fact…a social experiment to relieve the “stigma” of the masses you speak of, living as wards of the state in public housing on public assistance…we see the alleviation of “stigma” with food debit cards instead of tearing out food stamps from a booklet…of course leading to the moral hazard of “well hey, if I just sit on my ass the government will just take from someone else and give to me” mentality.

There should be stigma…it is a great motivator…I know.

The poorest among us will never starve (we have some of the fattest “poor people” on the planet) or be homeless (there is plenty of public housing)…or uneducated (well, what passes these days for education) unless they loathe themselves so much they do it to themselves.

Is the political/financial system rotten to the core???…yes. Can it be fixed to what was normal lending activity???…yes.

When you have bankers forced to make loans they don’t have to carry on their books, knowing they can sell those loans to “investment banks” who then pay the ratings agencies for AAA ratings on these loans no matter what the true worth is…with the coup de grace of then using something that may well be worthless as leveraged capital for something else, you have a recipe for disaster.

This was all done after the repeal of Glass-Steagall…now we know why it was repealed and we know WHO had it repealed and WHO got stuck with the bill…now the question is WHAT are we going to do about it.

If nothing…the wolfpack will form again here as it is preoccupied with fatted government largess in Europe right now.

Wolves have to eat too…and they provide a great service in nature as in finance by taking out unworkable concepts…like crony capitalists masquerading as free marketeers and their pampered pet poodles in DC…and they cannot be retrained or restrained nor would we want to.

Again a very complex problem ” welfare state spending “, creating debt. Let’s look at the US and only Social Security for an illustration . First the SS funds are sequestered into the SS Trust Fund. Until very recently, this year, SS trust fund income cumulatively exceeded payouts . SS income consists of payroll tax receipts and interest paid to the SSTF by the general fund. The payouts were the so called benefits. It can immediately be seen that SS payouts never contributed to the national debt.

Medicare is more nebulous but generally the same result occurred outside of mandated payments shifted to the states that the states had to borrow funds to fund on some purely pro rata basis. But again the main body of medicare payouts were funded by payroll taxes and interest from loans to the General Fund of the Government of the United States.

It can be seen from the foregoing that the General Fund has a whopping deficit in and of itself. It’s sources of funds are tax receipts, other receipts of government and loans from other funds like the SSTF and the Medicare TF. To cover pay outs the United States Treasury issues Treasury Securities that are the legal liability of the General Fund.

So what payouts are the payouts of the GF ? First government operations. The ultra big payout is everything related to Defense. The rest involve every possible gift horse the electorate seeks.

Absent all defense payouts and the GF would generate a surplus. So much so, that the SSFT funds could have been invested in US productive capacities to insure full employment. A whole host of things.

So where is the welfare debt? It is the military mostly at the Federal level. But none of the US national debt sold to the public derived from SS or realistically even Medicare . No more though. The SSTF now redeems it’s loans to the GF. That need not be the case if the law were enforced against criminal invasion of payroll taxes. The number bantered about in recent years is that at least $ 150 bn of these taxes are criminally evaded each year. My view is that the number is low. I was a ” Responsible Person” for a very large payroll in the hundreds of millions and a contractor payout system around ten times larger.

State welfare debt is another matter but it too is a relative pittance compared to total state debt. The biggy in state debt involves financing infrastructure like schools, universities and other capital projects outside those funded by the United States Highway Trust Fund and of course defense appropriations.

“Debt peonage looms for a wide range of countries that were recently thought immune to serious fiscal crisis, including the United States and UK.”

That is quite a strong claim. How about a realistic scenario instead of scare talk?

“The UK and US need to prepare themselves for more storms. The United States will be in the more pleasant position as the world’s safe haven, but this will only encourage America’s profligate politicians to spend more and build more debt.”

Profligate politicians? Well, they have been so in the recent past, but they failed to enact a sufficiently large stimulus last year or a realistic jobs bill this year. What happened to all that profligacy?

“The UK will bear much more pain from euro devaluation and financial dislocation, all exacerbated by its own large deficit and debts. We might well see one more invasion across the channel, this time by bond vigilantes who question Britain’s ability to rein in inflation as it builds too large debts.”

It has been a long time since the Battle of Britain. As I recall, Britain won. The bond vigilantes are nothing by comparison with the Luftwaffe.

“The entire world financial system is “fixed and gamed” and only the cockroaches will survive, and we know who they are.”

Cockroach

“Research has shown that group-based decision-making is responsible for complex behavior such as resource allocation. In a study where 50 cockroaches were placed in a dish with three shelters with a capacity for 40 insects in each, the insects arranged themselves in two shelters with 25 insects in each, leaving the third shelter empty. When the capacity of the shelters was increased to more than 50 insects per shelter, all of the cockroaches arranged themselves in one shelter.

Researchers found a balance between cooperation and competition exists in group decision-making behavior found in cockroaches.”

See for yourself. Here is the SS actuarial link and summary report. A rolling summary of each fund is included. Assets beginning, plus receipts, less payouts equaling assets ending.

Put another way the SS and Medicare system collected $2.8 Trillion more than they paid out as of the end of 2008. But, as of 2009, the general fund would need to sell Treasuries of $2.8 trillion to pay off the SSTF and related funds. Even then, not one penny of SS or Medicare would have contributed to the National Debt.

Problems they have. How about collecting the last five years evaded taxes from payroll tax criminals. That could concievably be another $1 trillion increase in assets to cover future payouts. Add in the criminal theft from Medicare crooks and the figure would be vastly higher.

“According to the economist Friedrich von Hayek, the development of welfare socialism after the Second World War undermined freedom and would lead Western democracies inexorably to some form of state-run serfdom.

As a result of the continuing euro crisis, the European Central Bank (ECB) now finds itself buying up the debt of all the weaker eurozone governments, making it the – perhaps unwittingly – feudal boss of Europe. In the coming years, the ECB and the European Union will dictate policy. The policy elite who run these structures – along with their allies in the private sector – are your new overlords.

It is arguable who exactly are the peasants, the vassals and the lords under this model – and what services will end up being exchanged, but there is no question we are seeing a sea change in the post-war system of property, power and prosperity across Western Europe, just as Hayek feared. An overwhelming debt burden will bring down even the proudest people.

The UK and US need to prepare themselves for more storms. The United States will be in the pleasant position as the world’s safe haven, but this will only encourage America’s profligate politicians to spend more and build more debt.

At the end of this great tumult, Europe and the UK will have sound fiscal regimes. Debt will be defaulted on or inflated away, and nations will have dramatically cut spending.
Hayek’s predicted demise of western society as he knew it will prove correct, but welfare socialism will prove the victim, erased by a political and financial elite gone awry.” – excerpts

Re: @ nmewn____Every country has a welfare state – the Swiss, French, Greece, etc.,be it through socialized programs quite similar, and factually mirroring America’s entitlement programs. You coined, better said, pinned the word “Stigma” on the poor (never met many people that didn’t want to earn a paycheck rather than a handout, you be the judge for it came out of your mouth?) rather than the steward’s (the artist of deception) of the serfdom? That’s right the TBTF Banks, Insurance Companies,Automobile (private,and public – what a joke) Companies – why don’t we just throw in the kithen sink too be on the safe side, but don’t blame it on the Banksters! The GSE’s cost to the taxpayers was/is approx. $790bn total. The cost to the American Taxpayers to pay for ,and backstop TBTF’s debacle ~ $16.12 Trillion last I checked. The wolves have eaten all the prey,(the pro-creation cycle is broken ,thus the food chain no longer exist?) as an old math analogy comes into play (cannabalism, a fitting epitaph, wouldn’t you say?) called, radicalized attrition.

This crisis wasn’t just caused by “the ideology of unfettered free markets.” It was caused also by the government’s desire to get more people with bad credit into homeownership. This started back in 1992 when the Federal Reserve came out with a paper that listed ways banks could lower their lending standards so that more people with bad credit could own a home. The paper is called “Closing the Gap: A Guide to Equal Opportunity Lending” and you can find it on the Boston Federal Reserve page.

And of course, Fannie and Freddie had very aggressive low income housing goals that wouldn’t have been met if subprime loans weren’t available.

Now, if one want’s to entertain conspiracies, the Federal Reserve is run both by the Government and large banks such as Goldman Sachs. I don’t know if Goldman Sachs did this but they *could* have bet the economy would dive from the subprime bubble and profited off of it. Just saying…

The reset button isn’t to defund the Government, although that would be an excellent move to force the real click of the button.

The solution is to take back control over the creation of money with a real central bank owned by the people for the people. What we currently have is a criminal fraud syndicate as defined by the RICO Act. Something most aptly described as “Parasitic Bubblism”. We need to arrest the scam artists who have been running this charade and who have completely taken control of governments worldwide and replace it with “Public Capitalism”.

First of all we must educate ourselves and the masses as to what banks are and where money actually comes from. The fiction is that we the people own the Fed (and other “central banks”) which creates money and lends it to the banks, who make their money on the spread between what they pay for it and what they lend it out for.

The truth is that only about 14% of money is created this way. Most is created by ledger entry by the banks themselves in a ratio of 10:1 loans to assets. So when you borrow money to finance your home, the bank takes your down payment and this gives them the ability to print the money to lend you. They in fact provide no good and valuable consideration beyond the ability to make a ledger entry. You provide all the value in the transaction – your down payment and your credit rating/cash-flow stream.

In the latest debacle, as interest rates declined, home owners were encouraged to refinance over and over as the value of their houses went up and rates went down. EVERY TIME a home owner refinances, the bank gets 100% cash on the principal balance plus interest paid and the funds for the new loan are created anew with another ledger entry. So a home owner with a house that started at $500K with $100K down that escalated to $1MM in value and got refinanced out to $1MM over the course of as many as 12 re-financings as rates declined from say 8% down to 5.25% made the banks who provided the loans (sometimes the same bank, sometimes multiple banks), as much as $7.5 million before the big collapse, which they engineered.

Why would they do that? For a host of greedy reasons:

1. Because all money is created in response to the demand for borrowing; a dollar isn’t a dollar – it’s a dollar with interest attached – it’s a pyramid scheme that will inevitably collapse when you run out of willing able borrowers capable of borrowing more money to keep it going. The banks have to pick the point to burst the bubble and do so with ruthless efficiency.

2. Knowing the above, bankers inflated the bubble as big as they could by the above scenario, making massive amounts of cash in the process.

3. They engineered the collapse to further enslave us all, while taking even greater profits by stealing millions of homes, which are often foreclosed upon, even though the homeowner has never missed a payment, because the “value” of the house is less than what they owe. So, they foreclose, sell the house for say 50% of what is owed and pocket your down payment along with all interest paid AND get to write off the pretend loss, for having not received all the payments over time.

4. While blowing the bubble up, they realized that they could really score by getting Lehmann, Merrill, Goldman, AIG et al. to create mortgage backed securities and create a faux market in these that made them appear to be liquid cash equivalent instruments. They traded them back and forth between each other, applied their own guarantees and each other’s to them and wrapped them with AIG’s guarantees and got the ratings agencies to give them a AAA rating. While this allowed them to sell them to pension funds and get 100% of the loans’ values as pure profit, the market was limited compared to the supply. The real purpose was to encourage small banks and securities houses that were increasingly moving into banker’s turf to create these derivatives for the purpose of moving loans from the loan side of the banks’ ledgers to the asset side, allowing them to fund mortgages at 100%, 110% even 120% LTV and not have any problem maintaining a 10:1 Loans to Assets ratio. The seminal event that encouraged this, was when Alan Greenspan testified to congress that these derivatives didn’t need regulation. Congress said, “OK Al, you know what you’re doing….” and the stage was set for seriously blowing up the bubble, while setting up the little banks, Lehman and Merrill to be gobbled up for pennies on the dollar and AIG to be taken over by the Fed, while completely enslaving us all. Here’s how it worked:

Once they got all the players setup, the Fed issued a seemingly innocuous rule change requiring that financial institutions with year ends after Nov. 15th, 2007 had to mark their assets to market and if there was no market, then they had to be marked to the lowest plausible value. (Something that is not done anywhere else in the western world! The acquisition cost is the book valuation for the purpose of calculating this ratio everywhere else.) The fuse was lit.

The financial bomb was set to blow, so the big banks positioned themselves to take full advantage. They pumped up the stock market and sold out at the top before bursting the bubble. They lent out money as fast as they could, knowing that they were “too big to fail”. When the bomb exploded in September 2008, they panicked the government into borrowing TRILLIONS of dollars, from them to bail themselves out! (“Let me get that ledger entry pen…”) They rendered the small banks technically, although not actually, insolvent on their precious 10:1 loans to asset ratio, once their assets (the mortgage backed securities) were non-valuable. Oooops! The FDIC swoops in as the instrument of the big fed bankers, and seizes all of the now upside down banks like Washington Mutual and Wachovia and literally get paid to take them, along with guarantees from the taxpayers that they will not suffer any “losses” from the toxic paper. Lehmann Bros. is absorbed by Barclays, who pushed the plunger to blow the charges to start the crisis by calling Lehmann’s credit default swap on mortgage backed securities they held for the purpose. Merrill Lynch got swallowed whole by B of A for pennies. AIG who had wrapped all that paper got “bailed out” by the Fed and the taxpayers, then paid out 100% on the defaulted guarantees, arguably making them worth more than they were before, because it had been demonstrated that they were too big to fail and that Uncle Sam would make the tax payers take the hit for them.

When the smoke cleared the banks managed to indebt each and every one of us and our children and our children’s children as the ignorant serfs of the banks. Not that we weren’t already, they just took it to a much higher level. More than 40% of what the government takes in as taxes is paid to these blood suckers for having done nothing more than make ledger entries. In the mean time, China is financially VERY strong and growing. Why? Because they have Public Capitalism. All money created, is created by banks, owned by the people for the people. All money is, therefore, paid back to the government from whence it came, having been made real and given value by the work of it’s people. China has no need for taxes, as the interest on loans is more than adequate to cover the cost of government, never mind the principal! They are swimming in money.

The reality is that we can make the ledger entries ourselves – it’s easy – and eliminate the interest completely. North Dakota has done with since 1919 with excellent results. They offer low interest loans to attract employers to the state and fund public projects at zero percent. They are perhaps the only state with a surplus these days….

If we don’t take control of our financial future, we are doomed to be completely dominated by the Chinese, who have figured out the right equation.

We can completely cover the cost of our National government with the interest on loans. The principal will cover the cost of state and local government. We can live in a tax free society, all we have to do is take back what the constitution gave us – the power to create and value money. By doing so, we can eliminate the problem of all money having interest attached, because government borrowed money would be interest free and because we would no longer pay 40% of government revenues to the banks. In short, we would really be free, not mere serfs merrily operating under the illusion of being free. We are not on the road to becoming serfs. We arrived there a long time ago. Now, the question is how do we click the reset button when the banks have bought the government?

Perhaps we should give the PIIGS what they deserve – USD as their formal currency. They’ve lost the right and privilege to call the Euro their own. Its better than the alternative – 25 years wandering around in an economic wilderness.

I agree that increasing government debt in order to keep 1000s of deadbeat companies like GM alive is fiscally unsound. But as a person that does business with some of those deadbeat companies I am fortunate that the government has come to their rescue. Being a single person and an Atheist I do not give a rats ass what will happen years from now when those debts cannot be paid. A bird in hand is better than two in the bush has always been my philosophy.

Personally, I don’t think a true “free market” can ever exist. Once a market player gets large enough to shape the laws and affect the enforcement of regulations, it will do so to its benefit and to the detriment of everybody else.

But once you start talking about limiting the size of businesses to prevent too much market power (and, therefore, too much political power), the free market purists step in to argue that the government shouldn’t interfere with the market like that.

John’s right about Somalia – their economy is free of government. It should be a libertarian paradise.

We need to stop paying private banks to issue currency. I think the endgame of peonage is already in place, with sovereign nations as peons to megabanks. Currently all currency is debt, and I hope everyone has noticed how the megabanks (the ones handling the “printing” of new debt) have avoided loss so far. Also notice how the bailouts all involve more debt. And finally, notice how the banks avoid any form of punishment when they get caught violating the law.

Step one to solving this is for sovereign nations to start issuing their own sovereign currency, not bank notes. Gold backed currency, btw, is a form of fiat currency subject to manipulation by the same megabanks so this is not a solution.

When government cannot provide neccessary services, a private sector business will fill the void. If you are one of the few that are providing a vital service, then you will be able to move into private employment.

Before we can fix any of these problems we first need to pull out the geocon root which is the Saudis and their CIA Bush’s. The Saudis own or control our government, and major bank and oil companies. America the Beautiful: from sea to sludge fill sea…

Yes, getting out of the debt spiral is difficult. I just turned 59 and am finally out of debt with the exception of a small mortgage. I pay no interest on credit cards and am invested in land. The problem is that the government also sees us as a source of revenue and unfortunately, we cannot get out of debt to the government. If we stop making income, they find another way to suck us dry. Just look at the impending value added tax that some in Congress are discussing. Anything to add more power to the government and remove more freedom from the individual.

I believe I was appropriately scathing in my remarks to both the crony capitalists (fascists really, but plantation owners for this analogy) and the slaves (the poor).

The poor are no better off now than they were before as what little credit performance they had in the past has now been wiped out by this little socialistic CRA experiment.

The experiment started with bribed votes in DC…to expect myself or others of like mind to participate in the planned next raping of the poor AND the middle class for fun and profit is to not know what free marketeers are…in a fiat world it will be difficult…but at least you will know we are there…circling ;-)

I will agree that recent history indicates that banking policy does tend toward stagflation. However, as the government increases entitlements, increases monetary supply and spends unsustainably, the ability of the banking industry to control inflation is GREATLY diminished. We are seeing now the beginning of a cycle that if not drastically disrupted soon will result in hyperinflation that will make the “Carter” years look like a walk in the park. Can you say Germany prior to Hitler or more recently Zimbabwe?

You could not be more correct. Since the creation of the Federal Reserve, the nation’s finances have been owned and regulated by the government to the extent that there realistically is no private sector financial market that is not controlled by the government intent on hiding the true degree of government debt.

Speculators are very much responsible for this chaos going on in Europe. Goldman Sachs in Greece… does the bell ring?…

You’re saying it is inappropriate for the Europeans to subject the rest of the world to these large, chronic risks. AGREED. HOWEVER, WAS/IS IT APPROPRIATE FOR THE US TO INITIATE THESE CHAOS WITH CROOKS AS GOLDMAN SACHS THROUGH ITS ROLE IN THE GREEK DRAMA (READ W. ENGDAHL) AND SUCH PUPPETS AS THE IMF (READ J. PERKINS)?

YOU SAID: This should start with a standstill and a program of fiscal financing while budget cuts are put in place. THIS TO ME READS LIKE YOU’RE PROPOSING SOMETHING THAT WOULD RESULT IN THE AVERAGE CITIZEN BEING THE CITIZEN.
BUT THEN YOU SAID: Hayek’s predicted demise of western society will prove correct, but welfare systems will prove the victim, rather than the mechanism, erased by a political and financial elite gone awry. THIS TO ME READS LIKE YOU KIND OF PRETEND YOU CARE?

I haven’t taken time to read many of the 143 responses preceding mine. I haven’t seen what I am about to say.

I’m afraid that economic feudalism is here to stay, globally. If we look around the world, regardless of government form, productive capacities, or any other major factor, there is one thing that seems to be common now everywhere. That the concentration of wealth, financial and otherwise, seems to be fairly dramatically increasing. Whether in the US, China, Russia, India, Europe, Africa, seems to make little difference. The rich and their powerful political allies have their boots on the throats of the general populations. Sure there are socio-economic strata in every country/society, but the distribution of wealth is moving upward, and the poor are increasing in numbers, the middle class is losing members, mostly not upward, but downward, and this seems to be going on at an ever accelerating pace.

The latest reforms in the US seem to point up the problem. Both the Health Care reform, and the financial reform seem to be structured such that little impact will occur at the top, and, if that is true, the negative progression of society will continue to follow the path of an accelerating chasm between the overlords (plutarchs/oligarchs) and the serfs (everyone else).

Sadly, what is happening in Europe has a real chance to cause economic chaos on a global basis, as the rest of the world steps into the gap created by a crippled EuroZone. Greater currency disparities would seem to be inevitable. This will foster further “innovation” and economic arbitrage by the overlords, both in Europe, and in the rest of the world. One has to wonder, if the American recovery doesn’t actually get started in earnest, where China will be able to sell all of the things that their vast supply of serfs produce.

Mary Mellor: ‘The recent global economic crisis has revealed the contradictions of privatised finance. If taxpayers have to prop up the system when it fails, why should they not also have control over the supply and allocation of money in the first place?’

The Basel Committee regulations requires the banks to hold 8 percent in capital when lending to a small unrated business or entrepreneur (a 12.5 to one leverage), but allows the banks to lend to countries like Greece which until quite recently was rated A holding only 1.6 percent in bank capital (a 62.5 to one leverage). And does not require the banks to hold any capital at all when lending to sovereigns rated AAA to AA-, infinite leverage.

To call something like that unregulated finance is just silly. It is an extremely heavy-handed and absolutely wrong regulation. And of course this helped cause that “the debt overhang is simply too large”

That said, in this article we suddenly read something different from Simon Johnson and Peter Boone like when they say “government are increasingly blaming “irrational” markets and speculators for homegrown problems.”

If this is a real change of heart I much welcome it. Of course we can share many of the ill-feelings against bad bankers… but while doing so let not even worse regulators get away with their primary share of responsibility

nmewn: “The poorest among us will never starve (we have some of the fattest “poor people” on the planet) or be homeless (there is plenty of public housing)…or uneducated (well, what passes these days for education) unless they loathe themselves so much they do it to themselves.”

Whether on a global basis or a national basis, as I understand things, the question these days in such matters is not one of total production, but rather one of distribution. There are certainly complications at all levels (both in production and distribution), but I do not believe it is fair or reasonable to systematically “blame” these societal problems on those people who suffer from them.

Its all a game people , free trade brought in outsourcing and off shoring to destroy the unions and the middle class. Then they send you credit cards to drown you in debt so they can brain wash you in to believing that the system is bankrupt and social programs are to blame. So now phase two, unravel the welfare state. All these people who think the private sector create the wealth and the public sector are a drain on the system are complete idiots.There is not two economies there is only one economy. Money is paper it is created out of thin air by the central bank. As some on here have already correctly stated many contracts the private sector run on are from government as well. from farmers to the space program to cleaning supplies for schools to the military. Its all government pork,you understand fools ? We are at war its called class warfare and its been going on for centuries. The credit card has subdued it to a point where the middle class no longer fight they just do what everyone else does.They just get another credit card add on more debt.As for hyperinflation, not a chance, japan has spent billions and billions over the last twenty years and they still have deflation, japan is our future.

@David F., N.A.
Yes, well, your series of youtube video links go from semi-legitimate (anchored to a particular individual’s views) to plain-old-propaganda with a series of unidentified “authorities” narrating the chosen points with increasingly propagandistically-biased materials to “spin the way”…. You in fact defeat your own stated perspective!! Reality may sympathize, but not without some reality…

Sigh… Freedy, I was basically saying that people consume resources, and as the world population grows, we need to consume more resources to feed them and provide basic necessities. Consuming more resources is inevitable if we don’t control for population growth. The CASSE website that Chris recommended didn’t mention anything about controlling population growth or about how to accomplish a steady state economy at all. I agree with the premise, but advocating for a change in our current way of doing things without offering a real alternative doesn’t really do much. Stuff like this is the reason we can’t convince people to change their habits.

And the apple tree example made perfect sense. It just didn’t agree with you, and so you didn’t like it.

i tend to think your shot is entiely off the dart board. government funding has quite different mechanisms in europe and the u.s.
in europe pension plans and insurers are the biggest ultimate holders of debt, with the economy in tatters now there simply are no net inflows to support government funding needs.
in the u.s. the government has been long ‘overtaxing’ in social security and has already spent ALL that money, only empty promises are left, furthermore, most pension plans are allowed to be run significantly underfunded, in the tune of 40-60%. this is no small change, the difference is trillions of dollars that the u.s. was able to spend to ‘produce growth’ where there was none.
on top of that, the structural budget deficits of the u.s. are much higher, only the sterilization of a big chunk of the newly printed money by china/japan has been keeping the value of the dollar so high.
when things balance or the reckoning day comes, the more fiscally responsible governments will stand, and the ones that perpetuated outright fraud will follow the faith of communist governments.

Explain how any of this was due to free markets? I dont see a free market in banking and financial intermediation and there never was one. Everywhere you look in the history of this mess you see the overrides on the free market causing problems be it interest rate targeting, mercantilist trade policies, the immense power given to rating agencies and the quest for AAA, to the insuring bank deposits and the bailouts themselves. A lot of these measures have allowed banks and asset managers to gain their huge size and homogeneity.

The only regulation that is needed is for those who do not want to participate in risky activity to be allowed not to ie separating investment and retail banking. Everyone else can take the bet if they like and if they do then they should be solely responsible for it. In this environment I think very few would want their money saved at the risky houses and risk would reign itself in. We need to accept as depositors in risky banks we are in effect investors and we need to provide oversight of bank capital ratios. The notion that bank deposits are risk free has been shown to be a lie.

“So the public bails out the very guys who rip them off. Untenable politically.”

No…the government bailed them out, after putting a gun to the public’s head and relieving them of their purse to do it.

Two completely different things.

I don’t recall one fiscal conservative or one NON-Keynesian (pick your flavor of Keynesian as they appear to have multiplied and mutated like a virus these days) supporting the bank bailouts or the auto bailouts.

It is precisely because the free market practice of bankruptcy where equity is wiped out and secured bond holders take possession of the firms (usually less than par) that we end up with fully recognized state controlled company’s like GM, Chrysler, Citi etc. ad nauseum.

No matter what you’ve been told or read, this is not free market capitalism where loss is socialized and profit is not…in free market capitalism bankruptcy is the price of stupidity, over leverage and greed.

After the bankruptcy future investor’s are wary and even more skeptical of placing their trust and money with failed CEO’s of the past…as it should be.

I believe that you are looking at the crisis in Europe from an American perspective. If you lived in the UK, you would know that Hayek was 100% correct when he said that the development of welfare socialism after World War II would undermine freedom and would lead western democracies inexorably to some form of state-run serfdom. Why do you think pur government deficits are so large. We are running not one but three countries within our country. Firstly, the NHS which employs over 1 million people at the taxpayers expense and is currently sucking up £110 billion per year. Number 2 is the Department of Works and Pensions which is also sucking up £110 billion per year and Number 3 is our Social Security System which is sucking up just over £100 billion per year. These three combined plus the ever increasing (unfunded) cost of the pensions owed to the employees of these departments, have very nearly led us to ruin. From a British perspective, I can say that Hayek was definitely right.

Yes for someone like me who insists on measuring the whole boom-bust cycle, instead of just focusing on the bust, the “spend to ‘produce growth’ where there was none” is the saddest part of the last circle of life of the US… it produced so little sustainable growth during the boom

Show me where bankers were forced to make any loans. They didn’t need to be forced when they realized they could immediately off-load the mortgages to the securitizing banks. Also, how do you account for the fact that a huge percentage of bad made loans were made by shadow banks that were not even covered by CRA?

Absolutely, not only was free market not present in causing this crisis, but even more importantly the free market has been kept away, until know, in the solution of this crisis… which is by the way why it has not been solved only postponed.

Wait a minute, wait a minute…are you sayin’ the Fed is the government? The Fed?

You mean the Fed of private banking cartel fame? The Fed that directs public-financed bailout cash in the billions to its private member banks? Where that cash then ends up in the pockets of the banks’ CEOs, executive elite, board members, and ponzi-scheme initiators – none of whom are government “employees”?

Interesting definition of “government.”

And you say the Fed is “hiding” gov’t debt?

Are you talkin’ about the hidden debt on the balance sheets of just about every non-gov’t Wall Street TBTF giant? You know, the “mark-to-market” properties worth zilch but listed on the books as worth ten times more than they’re worth so as to make the bottom line look “successful”?

Or this, from the WSJ of April 9:
“Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.” (No, don’t tell me the Fed actually KNEW about this “repo” scheme…and did nothing?!)

“A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.”

I wish you well. Sincerely. But entrenched belief systems like yours – and that’s all they are, belief systems – that refuse to actually consider “hard data” information…is a big part of the problem.
That “Loyalty to the Clan No Matter What” stuff.

Observation: Loyalty based on “no matter what”…is what’s bringing it all down.

“Ideology of unfettered free markets”? What are you speaking about here? It is as plain as the nose on your face that market participants were absolutely counting on the market not being free and were rewarded on that basis. The only guys that got the free market treatment were Lehman Bros. and they became the demonstration that proved the need to amplify the anti-free market initiatives. Folks who expected to be operating in a truly free market would have acted differently I believe.

What you ignore: The emotional and dare I say spiritual “health” and “balance” of those who rise to the top.

Bottom line: It’s not a level playing field, and never has been. And those dudes or dudettes who come into financial power, either by inheriting it, or being born into well-connected families, or “playing the game,” or going to the “right” universities…well, I see little evidence they have any sense of consideration for others beyond themselves and their tightly-knit “family” of co-conspirators.

Just a heads-up: People are starting to understand this dynamic more clearly than ever, and the masses are waking up. Waking up to a point of saying: This isn’t the way we want our world to work. It’s not just about profits anymore. You need to do what’s good for the “Whole.” And if you don’t, well…

…I sense we’re on the precipice of finding out what the rest of that directive is going to lead to. But you’d have to have your head in the sand not to notice…

While it is clear that what we have is and has always been far from a “free market,” it is hard to deny that the *rhetoric* of free market ideology was utilized by captured policy makers and bank industry lobbyists to establish and justify the repeal of Glass-Steagall (which is “the only regulation needed,” per Per Kurowski)and the non-regulation of CDS that has led us to the unwholesome combination of privatized profits and socialized losses that we have today. I think one can consistently believe (i) the free market works and (ii) the deregulation (or the fragmentation of regulation, if you will) of the 1990s and 2000s contributed mightily to the crisis by making the banking system more leveraged and volatile.

Think you have the government workers confused with the international financial class. They’re the ones who produce nothing of value and continue their existence through fear. I actually think people who collect trash, keep the water running and the power on, in addition to putting out fires and catching (low level) crooks are producing a lot with very few resources,thanks to blowhards like yourself.

What seems to have happened is that Basel II recommended capital ratios of as high as 1:62 that, in theory, should have created more money for — genuine economic stimulus. — Instead all this extra capital was absorbed by the casino banking system and the losses socialized. Bizarre.

Protection is a racket—whether provided by Don Corleone on the streets or Don Columbia Law School at some government agency. When was the last time an aggrieved customer was reimbursed by a regulator? As a general premise, nobody takes care of your money better than you do. If you feel that you have been mistreated there are plenty of securities attorneys and no shortage or rules from which to base your complaint.

To be fair to the Federalis, they are in a difficult position. The U.S. capital market regulatory structure is a hierarchical command-and-control process similar to the Soviet Union’s Gosplan. The Former Soviet Union lacked the information system from which to restructure. It was unable to address effectively global complexities. U.S. regulators find themselves in a similar situation. Their linear budgetary resources cannot satisfy exponential demands required by global capital markets with complex, innovative products. But most of their pain is self-inflicted since the regulatory structure focuses “investment products” (i.e. Volcker Rules’ proprietary trading) rather than “investment process” of segmenting capital market governance into predictable, probable, and uncertain regulatory regimes.

Furthermore, to make matters worse, regulators are almost exclusively trained in deterministic disciplines such as law, accounting, and economics—with little evidence of training involving complexity theory, or mathematics involving randomness. In a world of financial innovation and bubbles, it is uncertainty — not risk — that should be the randomness component of focus. Otherwise, bad information leads to flawed price discovery that creates “vapor assets”.

Recall the S&L meltdown, where the indeterminate “asset” on the books of many insolvent S&Ls was “regulatory goodwill” – the regulator’s reward for acquiring an even more insolvent thrift. Who could have foreseen the Resolution Trust Corporation’s (RTC) liquidations that occurred when minimum reserve requirements became illusory in a setting where capital consisted of vapor assets? Shortly thereafter, “Dot Comets” that had their initial public offering priced at 200 percent of forecasted sales soon became financial road kill when their projections were not met. Collateralized debt obligations (CDOs) and credit derivative swaps were the subprime boom’s vapor assets where NINJA mortgagors were given property rights in order to enable questionable securitizations at even more questionable AAA-ratings prices to take place. But when the bubble burst, “questionable” became “improbable” as deterministic metrics lacked robustness to manage indeterminate investments.

Stephen A. Boyko

Author of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” and a series of five SFO articles on capital market governance.

Ken, just so I understand your point – firemen, police, school teachers, ALL public employees are parasites on YOUR income?
How many business – excuse me – PRODUCERS, could “produce”, if there were not a stable environment to do so? Shall we go back to the Wild West, where it’s every man for himself and God for us all?
Sure, there are some government employees who don’t pull their weight. But I have worked in large industries where the same kinds of people draw a fat paycheck. Did they not take away from MY pay, by not being productive?
“Taxes are the price we pay to live in a civilized society.” As someone above pointed out, try doing business in Somalia or Zimbabwe.

“If the trouble starts — and it remains an “if” — the trigger may well be obscure to the concerns of most Americans: a missed budget projection by the Spanish government, the failure of Greece to hit a deficit-reduction target, a drop in Ireland’s economic output.

But the knife-edge psychology currently governing global markets has put the future of the U.S. economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession.

For the average American, that seemingly distant sequence of events could translate into another hit on the 401(k) plan, a lost factory shift if exports to Europe decline and another shock to the banking system that might make it harder to borrow.

The risk of a worst-case scenario is still considered remote. European countries have pledged hundreds of billions of dollars to aid indebted neighbors that run into trouble, and they say they are committed to fixing the continent’s larger economic problems.”

Russ wrote, in part, “There’s no doubt at all about how “unwitting” each step is on the road to neo-feudalism. How many decades would we have to go with each step being a step further in wealth concentration, the stagnation and deterioration of real wages, the shredding of the safety net, privatization of public property for pennies on the billions of dollars, scorched earth deregulation, galloping corporate welfare, the assault on civil liberties, and imperial agression economic and military, before we should start to figure that’s all one unified, systematic, intentional plan of attack?”

To complete the diagnosis of sadistic psychosis, the BELIEF was that there was an “elegant” mathematical formula to PROVE the “way of the world” – the infamous “Gausian Copula Function”.

Yes, there has never been 7 billion people on the planet, before now, living with a variety of “beliefs” that span the entire history of humanity – from superstition and magic and shamanism to scientists decoupled from science as the evolution of addesssing life-maintenance challenges (ie. architecture, medicine, agriculture, engineers).

I challenge the IDEA that humanity has been headed all along in the direction of a final, ultimate, and glorious mathematical achievement that is the truest truth that can be grasped GLOBALLY:

I used the wiki list. The central bank of China must have an enormous influence on Hong Kong. Chinese currency in HK must be very common and clears back to China itself. Whatever organization exists that issues currency for general circulation under command of the state functions as a central bank. For example, I see no reason other than political separation why the entire Federal Reserve System could not be put under the Secretary of the Treasury.

What really needs a keen looking into though is the highly anachronistic nature of central banks as the present exist due to declining uses of currency itself.

For example. As an excercise assume that the banks withdraw their deposits at the Federal Reserve bank as currency. It does no good in nations like the US because the banks would need to loan out the currency itself which when deposited would grossly exceed systemic cash needs. The deposited cash would wind up back at the FRB’s increasing their reserve deposit back to near where they started.

Now the banks could be given Treasuries instead of currency. In this case they would be selling around a trillion dollars of
Treasuries in a shortish time frame. Dumped in other words. Then, the currency backing of the United States at the FRB would be mostly all those mortgage backed securities they own. A sterling idea if F and F became state specialist banks with the idea of funding currency systems by domestic mortgages. The people’s debt backs the currency directly. Howls and screams!!! A land bank system.

Look at the differences. In one case paying off the reserve deposits with currency is a mere liability reclassification that does not liquidate the footings of the FRB’s. But the currency , given the structures in the US, is ineffective after a short period. Obviously, settling the reserve deposit with Treasuries liquidates the footings of the FRB’s.

Does this not leave just shipping the mortgage backed assets back to the banks laundered clean as a whistle as the other alternative act? BOught from the central bank as a hard cost? All are Fannie and Freddie guaranteed.

Only one methodology provides real transferable liquidity to the banks by pulling down their reserves at a cost of market disturbance … Distributed Treasuries. The political cost is that Fannie and Freddie guaranteed mortgages are the backing of the currency. A perfectly sensible solution that would cause wingnut screams for the next century. But above all create electronic funds for general circulation along with just paper money in a nation that does not use paper currency that much. A pittance amount against banking system/electronic transactions today.

So, let’s emulate the Sudan, in principle. The currency reverts to United States Notes with the FRB’s being Sub- Treasuries. While we are at it why not abandon the dollar name and call the currency Mahdi’s after Mohammed Achmed whose tomb is in Omdurman. Lovely idea, what what! ( The Riverine War is one of my favorite areas of interest for entertainment.)

Great piece by Michael Hudson, he says: Classical Economics evolved out of moral philosophy which sought to free markets from unearned economic rents and interest (usury). A meaning that has been inverted by the Chicago School of Economics.

Hayek was far more concerned about economic planning than about the welfare state. In fact he was cautiously supportive of some welfare state initiatives.

Now with respect to crony capitalism, we see $$$ passing from the hands of big business into the hands of politicians and we see changes in government policy. Simon Johnson sees businessmen buying influence and I see politicians shaking down politicians. Which interpretation is right? As I read it the Democrats and the Obama Administration see no problem at all with politicizing economic decisions. We see this most clearly in the micromanagement of GM by the Congress. Business people on the other hand understand that their success depends on managing the political side whether they like it or not.

So let’s call the enemy crony capitalism. Crony capitalism is the inevitable result of large-scale government intrusion into the economy. The Republicans have dirty hands in this business but the Democrats wallow in the pigsty with abandon. It is no mystery that Wall Street is overwhelmingly Democrat.

“Unregulated finance, the ideology of unfettered free markets, and state capture by corporate interests are what ended up undermining democracy both in North America and in Europe. ”

Regulatory capture is exactly one of the things Hayek explicitly warned of; he called it “corporatism.” (I’d call it mercantilism.) It is not the “unfettered free market” nor “unregulated finance.” Hayek’s work was focused so heavily on this — e.g. his business cycle theory — that one can only assume Boone & Jonson haven’t read any of Hayek at all. It’s shameful to misrepresent him this way.

Professor Stanley Liebowitz of the University of Texas posited that the single most important factor in home foreclosures was negative equity. “NINJA ” and “LIAR” loans improperly gave property rights to renters. A moral hazard is created whenever investor rights exceed investor responsibilities enabling unsophisticated investors to receive a regulatory subsidy to expand the scale and scope of their investment activity. Liebowitz demonstrated that the presence of such loans also misdirected policymakers’ focus toward the wrong variables to control the adverse consequences of the subprime crash.

Yes, Hudson resonates. What I find very interesting is his work in Latvia. He is part of a task force that is working in Latvia to repair and guide a country (if I’ve got my history right) that has dealt with Soviet occupation, Nazis occupation, and then turned into an economic basket-case by the Neo-Liberals. In my non-expert opinion, the reforms proposed by this task force appear sensible, decent, humane and a cause for hope. Which is saying a lot given the dismal economic state of Latvia.

Spent 5 years travelling back and forth to the Ukraine to help develop their capital. Very interesting life experience.

Following is letter written for the National Interest that may be of interest to you.

Letters to “The National Interest” – Odom’s Russia:
Because “Odom’s Russia: A Forum” (Winter 2001/02) focuses primarily on Russia’s political institutions, it ignores the question of the “commercial DNA” bequeathed to the economic enterprises of the post-Soviet successor states. This is of no minor import. Throughout the 1990s and into the present, the entrepreneurial drive to harness the enormous commercial potential in Russia and the other Newly Independent States has been largely absent, and its very absence ignored. Even as new laws and regulations were enacted, the brick wall of a stultified entrepreneurial ethos and a stagnant business culture have caused efforts to reform the former Soviet Union’s s economy and related governance structures to flounder.

The Soviet Union was a hierarchical structure that provided enterprises with detailed organizational charts and procedures manuals for the production of all goods and services. Prices were set through command-and-control processes, not buyer-and-seller negotiation. In business terms, the Soviet Union might best be understood as an unprofitable firm, with Josef Stalin as a robber baron CEO and the Politburo an overly compliant board of directors.

Unfortunately, Western reformers treated the post-Soviet world like an inefficient market. When the Soviet Union collapsed, thousands of intricately linked state-controlled enterprises were atomized. Western advisers assumed that these enterprises were embryonic capitalist operations that had simply been constrained by an inefficient market. Donor agencies provided regulatory infrastructure that, in some instances, made already Byzantine bureaucracies more burdensome and further constrained entrepreneurial initiative. This was not so much a question of right-vs. -wrong, but a matter of selecting firm-vs.-market remedies to be the independent variable for economic development.

Reformers emphasized market rules that permit voluntary exchanges between consumers, workers and owners of production. They ignored the need to make firms commercially viable. Ultimately, firms are the actual economic units that develop skills to produce goods and services. Soviet firms were not encouraged to be competitive. Innovation was not rewarded. The apparatchik culture favored political rather than business entrepreneurs. The entirety of the old Soviet corporate culture needed to go.

In commercially viable economies, markets and firms provide a system of reflexive checks and balances. Firms provide governance and transparency, and markets provide valuation multiples and liquidity. In Russia, large oligarchical “financial-industrial groups” use political connections to obtain subsidies and preferential treatment, and the shadow economy provides short-term payoffs. Despite regulatory changes in the Russian market, the apparatchik culture continues to thrive. Firm remedies are needed to empower Russia’s s economic development and provide incentives for the democratization of Russia’s socio-political institutions.

There should be ‘European leadership’. I agree. Coordinated default. Destroy the US bond markets. Never use historic US wealth to fund our states again. Develop European asset pools to serve European fiscal needs. Push the Americans out of Europe. This is an act of financial terrorism by US bond markets. They and their accomplices in the corporate media, propagandists and purveyors of disinformation concerning this ‘crisis’ (theirs), must be taught hard lessons. How dare they threaten us? What will they do? Nuke us. Go home yank. Get out. The war is over.

To be entrepreneurial is to be innovative and creative in a business sense. This is part of human culture, part of being human, so it is understandable there is untapped human resources in the kind of apparatchik culture you describe.

I’m not up to speed with what is going on in the Russian economy. So what if any “firm remedies” were/are needed in Russia?

You reform markets with infrastructure and regulation. You reform frims with labor reform and product redesign. Poland did this well to provide an example. The knock against the FSU was that it made more in the world that nobody wanted.

If this sounds familiar, it should: it’s the same formula the right has been using for a generation. Use identity politics to whip up the base; then, when the election is over, give priority to the concerns of your corporate donors. Run as the candidate of “real Americans,” not those soft-on-terror East coast liberals; then, once you’ve won, declare that you have a mandate to privatize Social Security. It comes as no surprise to learn that American Crossroads, a new organization whose goal is to deploy large amounts of corporate cash on behalf of Republican candidates, is the brainchild of none other than Karl Rove.

But won’t the grass-roots rebel at being used? Don’t count on it. Last week Rand Paul, the Tea Party darling who is now the Republican nominee for senator from Kentucky, declared that the president’s criticism of BP over the disastrous oil spill in the gulf is “un-American,” that “sometimes accidents happen.” The mood on the right may be populist, but it’s a kind of populism that’s remarkably sympathetic to big corporations.

To your point, one person who drove me around was once a mechanical engineer in the space program. One of my assistants had all but her Ph.D. thesis completed in mathematical complex theory. Alot of talented people with very few outlets for their talents.

“EJ: So what is your theory about the role of Simon Johnson who was Chief Economist for the IMF, now a professor at the MIT Sloan School of Management and a member of the CBO’s Panel of Economic Advisers? He was the first of rank to note that our political system as run by a financial oligarchy.

MH: He’s trying to promote monetarism with a friendly face. A lot of the things he writes are correct so he’s sort of the good cop setting things up for the bad cop. But he’s a Senior Fellow at the Peterson Institute, which carefully excludes economists whose idea do not make lobbying points for high finance.

EJ: His blog does sort of read that way, with an “on the one hand this and the other hand that” treatment of Wall Street malfeasance. Not much about the actual workings of the system, but suggestions for reform.”

Regulatory reform is suffering from its version of the Heisenberg’s Uncertainty principle. But instead of having to choose between velocity and location as the independent variable, regulators have to between “investment products (i.e. Volcker Rule’s Prop trading)” versus “investment process” that segments the underlying economic environment into predictable, probable, and uncertain regulatory regimes.

Distinguishing “stochastic” from “epistemic” uncertainty is relevant to the governance of today’s capital market. Is it more preferable to solve the “stochastic problems” relative to financial products of scale that is to-big-to-fail and scope that is too-random-to-regulate, or is it preferable to epistemically fix the “market process” by segmenting the underlying economic condition in terms of predictable, probabilistic, and uncertain governance regimes? I argue in favor of the latter and believe it to be consistent with the essence of Senator Dodd’s proposal to provide market practitioners with better information.

That is, in part, why in a world of financial innovation and bubbles, it is uncertainty — not risk — that should be the randomness component of focus. Otherwise, bad information leads to flawed price discovery that creates “vapor products”. Segmenting the regulatory process __ predictable, probale, and uncertain regimes__ is a more effective and efficient alternative than regulating investment products.

Recall the S&L meltdown, where the indeterminate “asset” on the books of many insolvent S&Ls was “regulatory goodwill” – the regulator’s reward for acquiring an even more insolvent thrift. Who could have foreseen the Resolution Trust Corporation’s (RTC) liquidations that occurred when minimum reserve requirements became illusory in a setting where capital consisted of vapor assets? Shortly thereafter, “Dot Comets” that had their initial public offering priced at 200 percent of forecasted sales soon became financial road kill when their projections were not met. Collateralized debt obligations (CDOs) and credit derivative swaps were the subprime boom’s vapor assets where NINJA mortgagors were given property rights in order to enable questionable securitizations at even more questionable AAA-ratings prices to take place. But when the bubble burst, “questionable” became “improbable” as deterministic metrics lacked robustness to manage indeterminate investments.

Stephen A. Boyko

Author of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” and a series of five SFO articles on capital market governance.

@Stephen A. Boyko No, I am not following you down that lane, because I try all the time to make a case about the need for regulations that even the lowliest of the regulators can understand… and that obliges setting a good example.

It is precisely regulatory over sophistication and mumbo jumbo that has got us to a point where some truly nerds in Basel managed to convince those who dared not ask, they had everything under control, with a confidence level of 99.9%, meaning that one bank could “expect to suffer losses that exceed its level of tier 1 and tier 2 capital on average once in a thousand years.”… as if we wanted banks that would fail on average once in a thousand years… too young to fail?

Any American newspaper, especially one based in the Northeast, has a lot of nerve pointing fingers at Europe. The panic was created in the USA, with Goldman Sachs playing a major role in Greece’s problems.

“a lost factory shift if exports to Europe decline”: Do you have any idea how low American exports are? More than a few years ago Pat Buchanan wrote a column on the top ten American exports; they consisted of mainly agricultural and chemical products. Boeing was the only shining exception, but with China just about to start building airliners (http://news.bbc.co.uk/2/hi/business/8243596.stm), that is about to go the way of the dodo bird.

“This is a market purely on life support, sustained by the federal government,” he said at the Mortgage Bankers Association conference. “Having FHA do this much volume is a sign of a very sick system…

The FHA, which backs loans with down payments as low as 3.5 percent, insured $52.5 billion of home-purchase mortgages in the first quarter, compared with $46 billion of purchases of the debt by Fannie Mae and Freddie Mac”

Forbes magazine recently demonstrated through an innovative graph (using 3 economic/financial indicators of corporate status among industry groupings) of world industries that banks/financial services are so large that make every other industry mere midgets. Remember financial services produce NOTHING !!

The legacy governance system for the US capital market is in disrepair. As discussed in a series of four SFO Magazine articles, regulatory inefficiencies have become such that they have reached the point of operational ineffectiveness. These articles are expanded upon in an interview http://www.sfomag.com/article.aspx?ID=1366&issueID=c and a book entitled “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System.” It describes what needs to take place to do the right things for governance effectiveness and how to do things right for governance efficiency. The articles go beyond simply profiling patterns of governance to build upon proven market and mathematical metrics that uncover principles of governance. Regulation in the Conceptual Age requires adding a third dimension for effective and efficient capital market governance. Before you can think outside of the box, you first must think outside the square.

Renovation of the legacy governance system requires a 3-D evolution. The proposed “Regulatory Rubik’s Cube” http://www.sfomag.com/article.aspx?ID=1353&issueID=c is built upon proven market and mathematical decision metrics to uncover principles of governance rather than simply profiling patterns of governance. While it is currently fashionable to criticize regulators, rating agencies, Congress, Government Sponsored Enterprises (Fannie Mae and Freddie Mac) Wall Street etc., I argue that “governance goofs” are more attributable to systemic structural obsolescence rather than individual shortcomings. Finally inefficient, under-regulation from two dimensional metrics that have to address three dimensional market realities lack processing speed. This is similar to using maps instead of GPS to navigate downtown traffic at rush hour. How efficient can that be?

Chaos theory governance requires randomness segmentation of predictable, probable, and uncertain regualtory regimes. If there is complexity, there is uncertaingy that cannot be governed by one-size-fits-all deterministic metrics.

It is helpful to reference America’s Twentieth Century conflicts with German National Socialists (Nazis) and the Union of Socialist Soviet Republics (Communists). If both were socialists, why was one labeled right wing and the other left wing? I argue that Fascism and Communism would have been more appropriately characterized by vertical, closed gov¬ernance structures that are characteristic of firms and operate in contrast to America’s flat, open market economy.

With this post you are starting to get closer to the problem. There are certain groups in finance and government who see a break down in regulated capitalism and the middle class it produces as being in their interest. In much the same way that the old money families in Argentina and Brazil strengthened their positions during these countries crises a similiar wealthy group in the U.S. and Europe intends to prosper from the crises in finance that they cause.

Do you mean to tell me that you actually watch my embedded links? I was just trying to slowdown the time it would take for this page to load.

If corporatocracy pertains to a country’s government, does a multinational corporatocracy pertain to a free marketing globalization? Is this how you spell “North American sweatshops”? (Yay, Nike’s gonna hire Americans to glue thier crappy shoes together.) This should get our children and great-great grandparents off their lazy asses. Viva la free markets (Right eh?).

“Here, I want to make one simple point: Hayek did not believe that history was inexorable. He believed just the opposite! He thought that a certain view of Socialism might lead to consequences that the Socialists themselves wouldn’t favor. He also did seem to believe in the 1970′s that a Welfare State could lead to similar consequences.”

As did De Tocqueville before him.

Sometimes I believe it’s pointless…but I do love this country and it’s people so…but it seems the American education system has done it’s “appointed” job…thank you Carnegie, Morgan, Rockefeller et al who were acolytes of Fichte, for this remarkable transformation of a free thinking, freedom loving people into statist drones…only educated enough to complete the task and hand and not question why they do it.

I grew up in the 60’s & 70’s when it was proper to “question authority”…now we have these assorted gray haired socialists and big government types of my generation begging the “authorities” to take care of them…the hypocrisy and collusion with “authority” by them is staggering…as the “authorities” are herd them through the gate.

One example I found jarringly sad and funny at the same time was a teachers union rally in Illinois recently where the chant went up “Raise Our Taxes, Raise Our Taxes”…they make their wages off of taxation!!!…LOL…why not chant “Slash My Pay, Slash My Pay”…the result would be the same to each of them…and they are TEACHERS to boot!!!

To add a bit of fuel to the fire. The first sentence in Robert D kaplan’s ” Warrior Politics” adds another dimension.

” The evils of the twentieth century arouse from popular movements that were monstrously exploited in the name of utopian ideals, and had their power amplified by new technologies.”

Just what is fighting itself out now in the US? To add more fuel… a new dimension I will label it “Dumbism”. The utopian delight in following the knowingly absurd because it will magically transmute into knowledge.

“Chaos theory governance requires randomness segmentation of predictable, probable, and uncertain regualtory regimes. If there is complexity, there is uncertaingy that cannot be governed by one-size-fits-all deterministic metrics.”

Not to split hairs….

“One of the most successful applications of chaos theory has been in ecology, where dynamical systems such as the Ricker model have been used to show how population growth under density dependence can lead to chaotic dynamics.”

Mr Boyko wrote, “To your point, one person who drove me around was once a mechanical engineer in the space program. One of my assistants had all but her Ph.D. thesis completed in mathematical complex theory. Alot of talented people with very few outlets for their talents.”

“Communism” fell once the sustainable wealth of Mother Russia that was “captured” by thieves at the beginning of the 20th century

was CONSUMED in the “making of too much of what the world didn’t want”.

There is nothing differnt going on NOW here at the beginning of the 21st century in the USA…

Except, as “Anonymous” noted, the sustainable wealth of the USA is getting consumed quicker by unsustainable wealth in less than half the time – 30 years vs. 80 years…

Ukraine and Russia have different “souls”, so to speak.

Although when gazing out into the “souls” of the rest of the planet, they might finally realize that the “devil” you know is SAFER than the “devil” you don’t…a choice to unify is always going to end up in a stronger union than a union made as a threat known as “no choice”…

I think we are done pretending that greedy consumers of labor’s sustainable wealth are in charge of the show…

To the critics of this post and followers of Milton Friedman and the Austrian School of Economics: What Simon, James and Peter are advocating is not unreasonable. Simply put, it is reducing the power of the large financial institutions (TBTF) so democracy can evolve.

Add here Britain (the Royal Bank of Scotland) and most likely Luxembourg … though come to think of it … maybe the socialist Norwegians did something right. At least one never hears of Norway in discussions on the financial crisis.

On God, risks and banking: This is what when an Executive Director of the World Bank I told the Regulators during a Risk Management Workshop in May 2003. (From Voice and Noise, 2006)

“In Against the Gods Peter L. Bernstein (John Wiley & Sons, 1996) writes that the boundary between the modern times and the past is the mastery of risk, since for those who believe that everything was in God’s hands, risk management, probability, and statistics, must have seemed quite irrelevant. Today, when seeing so much risk managing, I cannot but speculate on whether we are not leaving out God’s hand, just a little bit too much.

If the path to development is littered with bankruptcies, losses, tears, and tragedies, all framed within the human seesaw of one little step forward, and 0.99 steps back, why do we insist so much on excluding banking systems from capitalizing on the Darwinian benefits to be expected?

There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

Re: @ cheyennebode_____”So what’s the lesson?” I’m glad you asked – the Noble Peace Prize, and Noble Prize in Economic’s is a ruse,period! President Wilson gets us into WWl, and President Obama gets us into Afghanistan “Big Time”. Ironically both get Noble Peace Prize’s? The famed economist Friedman gets a Noble Prize in Economic’s ,and his works become the source-code/foundation for “Higher Education’s Economic Model” (look at where we are,…just take a hard look?)? The Noble Foundation is a ruse bought,and paid for by the oligarchy! They simply nominate a stooge,…a back door salesman, too do their bidding – a partially unknowing hubris individual, or an arrogantly narcissistic know-it-all unaware of their (finite usage/usefulness regarding the Noble`Oligarchy) subtle diabolical inveigle rhapsodized mitosis!

I agree with redleg…..the only true path out is for all countries, including the US, to return to debt-free money, issued by the goverment. the bankster gangsters cannot go on. there will be more and more political will to end this regime as people lose what they have left to lose.

free money exchange, and the end of the defense based economy will bring prosperity. of course, we know the Warriors and their leaders don’t want this…..and will resist.

as enough people begin to create their own new reality, society will reflect a new value system. imagine people gardening and refusing to eat the toxic processed food of corporate agriculture. imagine young people learning to develop skills without tuition, by learning from older people. most of all, imagine Americans learning to live without media control and perpetual shopping.

This is as good as point as any to say that I am critical of Basel II as it has proven to be a deterministic, linear metric that lacks the robustness for indeterminate, nonlinear investment instruments. As financial markets / institutions mature, the tough policy issues involve the timing and sequence of implementation.The purpose of Basel II, which was initially published in June 2004, was to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Given the nature of regulators, this has proven unwieldy and unmanageable. What I argue in We’re All Screwed and elsewhere is that the independent governance variable should be the capability to deal with randomness not the capital from which to establish TBTF capacity. The former will create wealth; the latter will have the unintended consequence of Too-small-to settle (TSTS) where counter-party risk will limit development of emerging markets.

“The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse of the OWB (the only bank in the world) or of the last financial dinosaur that survives at that moment.

Currently market forces favors the larger the entity is, be it banks, law firms, auditing firms, brokers, etc. Perhaps one of the things that the authorities could do, in order to diversify risks, is to create a tax on size.”

At the expense of beating a dead horse, much of this occurs as a result of regulators conflating “risk” and “uncertainty.” There are four ways to manage uncertainty that include: combining uncertainties through larger scale, increasing control of the situation, slowing throughput, and increasing knowledge. The subprime financial crash illustrated that, while current capital market governance is almost exclusively deterministic, Treasury Secretary Paulson’s remedies relied heavily on uncertainty metrics by:

1. Using greater scale to propose a $700 billion RTC-type pool for troubled assets,
2. Banning short selling for more than 800 financial institutions from September 19, 2008 until October 9, 2008 to exercise greater control over bear raids, and
3. Slowing throughput by re-instating the up-tick rule.

For there to be a reversal of the troubling trend of more frequent and larger systemic crashes, there needs to be an accurate characterization of the underlying economic environment. This requires moving beyond risk management metrics to segment the underlying economic conditions into predictable, probabilistic, and uncertain regulatory regimes.

“In a speech yesterday at Johns Hopkins University, Larry Summers, President Obama’s top economic adviser, made the case for increased spending to stimulate the economy, arguing that paying down the U.S. deficit in the near term could pose serious economic risks.

At the Atlantic, Derek Thompson quipped that the Obama administration was finally explaining Keynesian economics, and suggested that Summers’s speech was part of a larger strategy to reassure those concerned by the $1.5 trillion budget deficit.”

Hayek had the sign and the destination right but was entirely wrong about the mechanism. Unregulated finance, the ideology of unfettered free markets, and state capture by corporate interests are what ended up undermining democracy both in North America and in Europe.

Wrong.

The unsustainable welfare state led to unregulated finance.

Most financial institutions are fractional reserve businesses which Hayek and his brethren would argue either need close regulation or need to be given a chance to prove their inherent insolvency once and for all. Government neither closely regulates them nor do they allow them to fail – mostly because welfare states tend to want to run the same fractional reserve leverage operation. Welfare, like leverage, is inevitable but is only sustainable to a certain point which when exceeded reaches a point of unsustainability and crashes.

Essentially, it is over-indebted governments needing to keep their borrowing costs down that eventually results in them capitulating to the inevitable banking demand for more leverage. In short, if government says no to banks, it is also saying no to itself.

The most recent domestic proof was Fannie and Freddie who were well-regulated until about 2003. Their largest shareholders – public pension funds – demanded increased returns to meet their unrealistic pension obligation goals. As such, Fannie and Freddie dived into MBS at exactly the time the rest of the market had ran those 2 GSE’s as far as they could go; because of the increased demand from government pension funds, Fannie and Freddie started buying MBS they previously saw as too risky.

We’re still waiting for government pension funds to recalibrate their demands to a de-leveraged market and it’s been going on 4 years now.

But Hayek argues the exact same thing – less leverage to fractional reserve operations. (Also, Milton Friedman was not an Austrian Schooler.) You can’t be against Hayek and agree with him at the same time.

Since Hayek came before Simon, James, and Peter, we can safely assume that they are either mis-reading Hayek, mis-appropriating someone else’s wrong thinking to Hayek, or are advocating something they themselves don’t even understand.

In a world of financial innovation and bubbles, it is uncertainty — not risk — that should be the randomness component of focus. Otherwise, bad information leads to flawed price discovery that creates vapor assets. Much like the misdiagnosis of a medical condition, adding deterministic medicine to an indeterminate malady only causes the patient to become more ill. Similarly, conflating “risk” and “uncertainty” exacerbates capital market structural problems thus accelerating the troubling trend of larger and more frequent economic dislocations.

Recall the S&L meltdown, where the indeterminate “asset” on the books of many insolvent S&Ls was “regulatory goodwill” – the regulator’s reward for acquiring an even more insolvent thrift. Who could have foreseen the Resolution Trust Corporation’s (RTC) liquidations that occurred when minimum reserve requirements became illusory in a setting where capital consisted of vapor assets? Shortly thereafter, “Dot Comets” that had their initial public offering priced at 200 percent of forecasted sales soon became financial road kill when their projections were not met. Collateralized debt obligations (CDOs) and credit derivative swaps were the subprime boom’s vapor assets where NINJA mortgagors were given property rights in order to enable questionable securitizations at even more questionable AAA-ratings prices to take place. But when the bubble burst, “questionable” became “improbable” as deterministic metrics lacked robustness to manage indeterminate investments.

Author of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” and a series of five SFO articles on capital market governance.

stop using credit. thats what created the phoney money system to begin with. when enough of us stop using credit and use only cash the fraudulent money system must dissapear. it may reduce massive overconsumption as well.

Regulators are ill-trained (almost exclusively deterministic accountants, attorneys, and economist) for indeterminate underlying investment environment and ill-positioned two-dimensional metrics in a three-dimensional world. Regulators are using maps when they should be using GPS. The U.S. capital market regulatory structure is a hierarchical command-and-control process similar to the Soviet Union’s Gosplan. The Former Soviet Union lacked the information system to restructure. It was unable to address effectively global complexities. U.S. regulators find themselves in a similar situation. Their linear budgetary resources cannot satisfy exponential demands required by global capital markets with complex, innovative products.

oh and you dont know the HALF of it!! in american our wonderful capitalists have bought and liquidated all but 5 – 8 % of union labor, and they STILL are ruining the global economy! its positively SUPERNATURAL the power even a single middle class worker has over the world economy.

Yes Moody’s, S&P, and Fitch were recognized in 1975 by SEC as NRSRO but it was really with Basel II and the extraordinary powers assigned to the ratings in determining the equitey of banks that they became dangerously over-empowered.

I do not expect anything less than socialist crybabies when I post…why should any other rational person???…LOL.

Look what we have above…for the most part the standard boilerplate…”we need MORE regulation” when regulation was the problem…was not the CRA government mandated regulation???…hell…let’s throw another trillion dollar “kitchen sink” at it to keep entitlement checks coming so Volvo drivers won’t be inconvenienced by burning tires in the streets…freakin idiots.

Bureaucrats sitting around watching porn all day at the SEC, now shockingly enough…LOL…at the Interior Dept. while we have oil gushing in the gulf…next they’ll announce there are more bureaucratic paper shufflers working in the Agriculture Dept. than there are actual FARMERS!!!…oh wait…they just did.

“Unregulated finance, the ideology of unfettered free markets, and state capture by corporate interests are what ended up undermining democracy both in North America and in Europe.” This is the lamest of all excuses and the weakest of all arguments. It has been used time and time again to promote socialist policies or to undermine the capitalist system. The basic premise is a negation of freedom on the basis that freedom is not perfect. It also denies 2 centuries of enlightenment and material advancements. The statement is profoundly wrong and all thinking that uses it as a basic fundamental has to be discarded.

There are much better thinkers and pieces exposing in bits the mistake that European socialist route represents for America. One of these is “Lessons From Greece: It Got The Slave Class that America wants to Create”. It is closer to the dark truth that economic policies are being used to establish long term political power. It is at http://www.robbingamerica.com

As soon as you use the phrase “tax cuts for the rich” you expose your pre-conceived position. Most people will stop reading right there since they already know what you have to say. And by the way, I don’t imagine you know what an oxymoron that phrase is in a country where 10% of taxpayers (The rich) pay 75% of all taxes.

I suggest you rethink your position. If you are an American citizen, enjoy the benefits of the American system, and especially if you enjoy investing in the markets, you certainly do owe something.

One of those things is enshrined in the military contracts I signed. I am one of the unfortunate few and had to leave military service after breaking my neck and lumbar on a night parachute jump at Ft. Bragg two years before retirement. I now collect on the military contract with a VA disability compensation for the productivity I lost in the line of duty, training in defense of this country. Part of the contract.

Let’s do away with the ideology and propaganda of the platitudes of patriotism and supporting the troops. In reality it is much more of a mercenary endeavor. The US military serves to keep the geopolitical situation stable and therefore the markets stable. We keep the shipping lanes open and we secure the oilfields. We keep the markets stable so that people like you can invest and profit. You profit off of our labor. It is a symbiotic relationship and when we are injured in that service, we get taken care of.

Now that there are hundreds of thousands of freshly minted combat veterans with multiple tours in counter-insurgency theaters of operations, I really don’t think you want to tell all of us that now after we have fought and sacrificed for you that “you don’t owe us anything”

Even the Romans realized this when they began to give 25 year veterans of the Legions small plots of land to farm. They realized how dangerous it was to have thousands of idle combat veterans wandering around.

You comment is as naive and dangerously ignorant as anything Marie Antoinette ever said.

NEW YORK (CNNMoney.com) — “U.S. stocks soared Thursday, with the major indexes gaining about 3%, after Chinese officials dismissed reports that they’re reviewing their nation’s investment in European bonds amid concerns about the continent’s debt problems.”

Deficit Eclipses Jobs In Congress: ‘Nickel-And-Diming The Most Fragile People’

05-29-10 10:40 AM – excerpt

“Late on Thursday evening, Democrats were arguing on the House floor over the size of a jobs bill that was two days overdue for a vote when word started to filter through the chamber that the Senate had adjourned and was leaving for the Memorial Day break. With no Senate, there could be no bill.

“We’re in the midst of this debate and trying to find a path to doing the right thing and they went out on recess? Without addressing these issues? Some of which have deadlines? I mean, there are going to be unemployed Americans who will not have their unemployment extended.”

On June 1, several programs, including extended unemployment benefits, will expire. By the end of the week, 19,400 people will prematurely stop receiving checks, according to data from the Department of Labor. How long will it take the Senate to finish the bill? With Republicans promising to stand in the way, leadership will need to file at least one time-consuming “cloture” motion to break the filibuster and to set up a vote by the end of the week in the best-case scenario. By the end of the following week, the number of premature unemployment exhaustions will climb to 323,400. The week after that, 903,000. By the end of the month, 1.2 million.

“But the numbers really don’t tell the story,” said Marc Katz of the National Association of State Workforce Agencies. “The states are going to get calls from very concerned claimants about what’s going on, what’s the outlook. That’s the real story. And it puts claimants through real anguish. It’s just terribly unfair to them.”

“Technical indicators suggest market collapse could begin by
US stocks dropped on Thursday, driving indexes down more than 2% on growing fears that the Eurozone’s handling of its sovereign debt crisis could jeopardize the global economic recovery.

US economist Nouriel Roubini believes problems on the macro level are first in Eurozone then in China. “There are elements of economic slowdown—the PMI’s come out weak, there is inflation, asset bubble, credit tightening and an attempt to slowdown the economy, Japan is in trouble and US economic growth will slowdown. There is a greater risk of global macro problems in a situation, which now, there are fiscal problems that are very severe—not just in Eurozone but those in Japan, UK, US and there is also regulatory risk because we don’t know how reform will occur,” he said.

Roubini sees risk of double dip recession in some parts of the globe.

“There are some parts of the global economy that are now at the risk of double dip recession. I certainly see that risk in Eurozone where fiscal problem, the loss of competitiveness, dynamic growth in Eurozone was already bad and before this shock to Greece there was Portugal, Spain and from here in I see things getting worse. There is also anemic economic growth in Japan. There could be double dip there. US economic growth in the second half of the year is going to slowdown as the inventory adjustment goes away and as fiscal stimulus becomes drag on growth by second-half of the year,” he said.”